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What is a cost segregation?
Cost segregation is a tax planning strategy that can be utilized by virtually any taxpayer who owns, is constructing, acquiring or renovating a commercial or rental property. Cost Segregation allows Property Owners to save on taxes by accelerating depreciation deductions and deferring tax, thereby increasing their cashflow. In order to “accelerate depreciation”, a cost segregation study identifies and reclassifies certain items that can be depreciated over a much shorter time period than the actual building itself. Most owners depreciate their property using a “straight-line” method over 39 years for commercial or 27.5 years for residential. By utilizing cost segregation, property owners can unlock hidden value in their property and increase cashflow by taking advantage of the Time Value of Money (TVM).
Cost Seg ONE (CS1) can show you how you can increase your cashflow and maximize your tax benefit by using our engineering approach to accurately identify personal property items that can be depreciated over an accelerated 5,7 and 15 year period. Contact us today to get started
How is a cost segregation study performed?
A cost segregation study should be performed by a specialized company with staff knowledgeable in engineering, construction, estimating, and case specific tax law. A properly performed cost seg study should include an actual on site visit by an engineer. In addition, a detailed analysis of items such as cost data (including the building contractor’s application for payments, change orders, owner incurred costs), architectural/engineering building plans, lease agreements, material components, direct labor and indirect costs are all taken into consideration. If construction cost data is not available, the engineer will price components using tools such as Marshall Valuation Service and RSMeans Building Construction Cost Data. A quality Cost Seg Study will perform a complete “take off” analysis of the property and account for ALL depreciable costs, including items that can be recovered over short and standard depreciation timelines.
After the on site visit and review of applicable information, the engineer(s) will produce a highly detailed analysis that breaks down all costs and allocates them across the appropriate depreciation periods (5, 7, 15, 27.5/39 years). Each and every building has different circumstances that need to be considered. Items that can be accelerated in one building type, may not qualify for accelerated depreciation in another. Due to this reason, is imperative that a reputable company with qualified engineers be consulted when conducting a study.
Does my property qualify for cost segregation?
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Cost segregation will benefit both commercial and residential rental property owners if they placed into service or purchased the property after December 31st, 1986.
When considering a cost seg study ask yourself the following questions?
1)Did you purchase, construct or renovate the building after 1986?
2)Is the cost of your building at least $1M (excluding land value)?
3)Do you have net income that is currently taxed?
4)Do you plan on holding on to your property over the next few years?
If you answered “Yes” to these questions, then a cost seg study will benefit you. Contact Cost Seg One today to get started
What types of properties qualify for cost segregation?
Cost Segregation Studies can be performed on almost any building type in any industry. For example:
- Apartment Complexes
- Automobile Dealerships
- Assisted Living Centers
- Distribution Centers
- Fast Food RestaurantsÂ
- Food Processing FacilitiesÂ
- Hotels/MotelsÂ
- Lifestyle Centers
- Manufacturing PlantsÂ
- Medical Office
- Nursing HomesÂ
- Office Buildings
- Power Centers
- Retail ChainsÂ
- Certain Residential Rental Properties
- Self Storage Properties
- Shopping Malls
- Sports Stadiums
- Supermarkets
How much should I expect to save with a cost segregation study?
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According to the Journal of Accountancy (Copyright 2005 by the AICPA) “Each $100,000 in assets reclassified from a 39-year recovery period to a five-year recovery period results in approximately $22,000 in net-present-value savings, assuming an 8% discount rate and a 40% marginal tax rate.” Depending on the property type, construction methods used, year building was placed in service etc. It is not unheard of for a cost segregation study to generate our clients several hundred thousand or even millions of dollars in net present value savings (NPV).
Will Cost Segregation cause me to get audited?
No. That is, not if you are taking the properly allowed amount of depreciation, as allowed by the IRS. The IRS has laid out specific guidelines for how cost segregation can be used.
Of important note, is that according to the IRS supported Audit Techniques Guide, Cost Seg studies that are performed by individuals who are not properly qualified using the residual, or “quick and easy” based methodology of reporting will come under much higher scrutiny than studies performed by qualified companies utilizing the engineering approach. Therefore, it is very important to make sure the cost seg provider you are working with performs true “engineer based” studies. Cost Seg One prides itself on having some of the industries most reputable and experienced engineers on our team.
Why doesn’t my accountant already do cost segregation for me?
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The IRS understands that a cost segregation study requires engineering expertise. Therefore, while very knowledgeable in the area of taxation, CPAs do not have the level of expertise necessary to accurately perform a MACRS cost segregation report. While performing a cost segregation report, an engineer is required to interpret blueprints, analyze construction methods, perform a thorough inspection of the building, and estimate certain components. Additionally, since certain assets can qualify for accelerated depreciation in one building type and not another, a blend of knowledge in the specialized fields of Engineering and IRS rulings/Tax law are required in order to create an accurate and defensible study. The Cost Seg One team is comprised of engineers, estimators and construction experts as well as seasoned tax professionals who have specific expertise in accelerated depreciation. Cost Seg One also has established a strategic partnership program to help provide CPA’s with an outsourcing method to ensure their client is working with a specialist, knowledgeable in the areas required to perform and IRS defensible cost segregation study. If you are an accountant or would like to encourage your accountant to enroll in our Partnership program, click here to learn more
What if I’ve already had a Cost Segregation Study performed?
With no obligations and no charge to you, Cost Seg One (CS1) will review your existing cost seg study to determine if it is a true “engineer based” report. We’ll quickly be able to review the document and determine the quality of the report. Many times we have found clients with studies that they thought were “engineer” based studies were actually “residual” based. In today’s marketplace many cost seg providers are performing “quick and easy” residual based studies. Often times unsuspecting owners and CPA’s alike cannot tell the difference between an engineer based study and a residual one. Unsuspecting owners may be at risk of having paid for a study that does not stand up to the IRS standards set forth for MACRS cost segregation.
How do I get Started?
CS1 can provide you with a free proposal on how we can start saving you money. Please follow the links listed below and fill out the questionnaire. Upon submittal, we will provide you with a proposal outlining the estimated tax savings benefit a CS1 Cost Segregation study will create for within 48-72 hours.) |
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