Cost Segregation FAQ's
Cost segregation is the process of identifying and separating assets that can be classified as personal property. This allows property owners to accelerate depreciation, reducing or deferring tax liability and increasing cash flow in the short term.
Property is typically depreciated over a period of 27.5 or 39 years, whereas personal property is depreciated on an accelerated schedule of 5, 7, or 15 years. By identifying those components of commercial real estate that can legally be classified as personal property – and segregating those from commercial property components for tax purposes – property owners can leverage their allowable depreciation deductions significantly sooner than they otherwise might. By lowering or deferring tax liability, property owners can free up liquid assets in the short term. In addition, you may also see a reduction in property and transfer tax liability.
Any property that was purchased or constructed after 1986 is eligible for cost segregation depreciation, as long as the property is located in the U.S. and the depreciable cost basis is $300,000 or above. Properties that have undergone major renovation after 1986 may also qualify, as may some types of leasehold improvements.
Cost segregation is allowed under the U.S. tax code. Like any other strategy designed to minimize tax liability, some people may push the boundaries past the point of legality. It is impossible to predict whether the IRS will want to review your study or not. However, as long as you remain in compliance with the applicable laws and federal codes, you should not experience adverse consequences.
If you are subject to an audit, the IRS audit guidelines state, unless the subject cost segregation study is performed by a qualified party, the study must be reviewed with a higher level of scrutiny. For this reason, you must choose a qualified cost segregation advisor to perform your study.
The federal tax code does not detail specific requirements for cost segregation studies. In a 1999 legal memorandum, however, the IRS stated that “An accurate cost segregation study may not be based on non-contemporaneous records, reconstructed data, or taxpayer’s estimates or assumptions that have no supporting records.”
When conducting an audit, the IRS follows an extensive cost segregation audit techniques guideline, which lays out the elements of a quality cost segregation study. The requirements of any given study can vary based on the specific details, but the one constant is that studies must be prepared by a party with the required level of experience and expertise.
The experienced team at Cost Segregation Authority is dedicated exclusively to the delivery of cost segregation services – we do nothing else. Our background in the commercial construction and real estate investment sectors spurred our segue into the industry almost two decades ago.
Today, we are known throughout the industry for our exceptional work and highly personalized and responsive service. We stand behind our work 100% and even provide no-cost audit support for any matter related to our studies. We even offer a free benefits analysis, to help you understand just how much our professional cost segregation services can benefit you. Check out more of our Resources here!