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"Money doesn't grow on trees...but according to the IRS, could be hidden behind the walls" Cost Segregation Studies have become an increasingly valuable, but not a commonly understood tax strategy that should be considered by virtually every tax payer who owns, constructing, renovating or acquiring a real estate facility. It's tax benefits can be applied to virtually all types of real estate that have a building cost of at least $650,000.
What is Cost Segregation?Cost Segregation is a lucrative opportunity for commercial property owners to recoup a big chunk of their purchase or construction cost by applying an accelerated depreciation schedule to property usually classified as "real" (Section 1250) -but under improved IRS rulings - can be reclassified as "personal property" ( Section 1245).The concept of Cost Segregation is fairly simple. The IRS Code allows the structural components of a building to be depreciated over a period of 39 years (27.5 years for residential investment property ). But non structural components such as: carpeting, electrical system, ventilation, air conditioning, plumbing, land improvements, parking lots etc.. can be compressed into shorter cost recovery periods (5,7 and 15 years). When these non structural components are segregated into a much shorter depreciation class and reclassified as personal property, substantial savings can be realized immediately. In some cases, up to 40% of the purchase price of a building can be recovered in the form of tax deferrals! How come my CPA hasn't brought this to my attention?Until about 2004, Cost Segregation was only available to commercial property owners who were clients to the elite big 4 accounting firms. Most CPA's are aware of accelerated depreciation but do not have the architectural and structural engineering background to perform this very detailed extensive study that's needed to maximize the IRS Cash Benefit. This engineering-based study must be performed by a qualified engineering firm, or thousands and even hundreds of thousands of dollars could be left on the table. Today, many CPA firms are partnering with our Cost Segregation Team to bring this important accounting method to their clients.What are the qualifications for the study?If you answered yes to these questions, then you should consider a Cost Segregation study. What are the immediate benefits?
Can I do the Segregation Study?No, for two reasons. First, you will obtain maximum benefit by hiring a firm with expertise in onsite engineering surveys, estimating, appraising and allocating construction and acquisition cost based on IRS Techniques/Guidelines and case law. Second, the IRS states that: "an accurate Cost Segregation study may not be used on non contemporaneous records, reconstructed data, taxpayer's estimates or assumptions that have no supporting records.""Cost segregation studies require a skill and understanding of case law that is vested only in specialist. The studies require a significant expenditure of time in preparation...Only those taxpayers with access to the professionals who can prepare a valid study may claim this tax benefit." Ken M. Berry, IRS Our Cost Segregation Team provides years of experience in Cost Segregation and Structural Engineering to meet all IRS, Treasury and legal requirements. How fast can I receive my cash benefit?Savings are generally available right away. For newly acquired buildings or improvements savings begin immediately by using the shorter lives and accelerated methods in the tax returns filed for the year that the assets are placed in service. For older buildings or improvements, any savings not taken advantage of since the construction, may be recovered or caught up. In some cases a tax refund can be obtained depending on the taxpayer's circumstances.What are the typical savings I can expect from the study?The average net present value (NPV) of additional cash flow is approximately $100,000 for every $1,000,000 of 39 year property that is reclassified. Typically between 15% - 40% of a buildings overall cost can be reclassified to one of the shorter cost recovery periods. The actual cash benefit depends on the type of property and it's specific construction components.Example: The Wall Street Journal reported an interesting example of a real estate developer in Southern California who used Cost Segregation accounting to his advantage, saving hundreds of thousands of dollars in taxes in the first year after performing the study. After developing a $4.6 million manufacturing facility, the owner could have depreciated the property by $120,000 using the simple 39 year straight line IRS formula. But by using Cost Segregation, the owner was able to depreciate the property by $397,000 in just the first year alone. Breakdown of how clients can benefit:
IRS and history on Cost Segregation:Although Cost Segregation has a long history, the basis for today's studies were established in a landmark US Tax Court decision in 1997 by the efforts Hospital Corporation Of America. HCA argued even after the tax changes in 1986, the old tax rules could be used for separating personal property from a buildings structural components for depreciation purposes. The law suit between HCA and the IRS ended up in US Tax Court, which eventually sided with HCA.This ruling saved HCA millions of tax dollars and ushered in a new era in Cost Segregation accounting. This tax strategy is supported by more then 200 court cases, treasury regulations and IRS revenue rulings. What is involved in having a study done?1. Our Cost Segregation Team offers a Free NO RISK Initial Review to determine feasibility / applicability. We will evaluate your current tax status and future business plans with your CPA to determine whether a Cost Segregation Study will benefit you.2. Our Cost Segregation Team will then ask you to provide us with preliminary information from which we will run through our software to furnish an assessment of the potential savings that may available. 3. Our Cost Segregation Team will visit the site and meet with you in person and review the potential cash benefit and our fees to conduct the study, as well as answer any and all questions. 4. With your written approval, we gather information from your construction documents and other supporting information to show how components and systems are utilized. 5. We then bring in a team of specialized engineers to perform the on site study. Our team uses state of the art industry tools to segregate cost based on case law and strict IRS Guidelines. How much does a study cost?It depends on the project. Each study is unique and the fee is comprised of many different variables. We charge a reasonable fee depending on the size and scope of the project. We also bring other valuable cost savings techniques that separates us from all other firms.The finished product:At the conclusion of the study, Our Cost Segregation Team delivers and reviews with you a written and detailed report showing the breakout of the costs qualifying for the shorter lives, outlining the methodology used and documenting the allocated cost in detail. More importantly, providing a complete audit trail that will withstand an IRS Audit.Additional benefits of having a professional, engineering based Cost Segregation study completed:
Why hire our Cost Segregation Team to perform your study?Our Cost Segregation Team of Engineers have been specializing in Cost Segregation services and have been offering award winning Architectural and Engineering services since 1989. We offer a unique blend of tax professionals, extensive experience in design and structural engineering which allows us to properly identify and classify cost of building elements to maximize the benefits from a Cost Segregation Study.How some of our clients have benefited:
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