Cost Segregation Overview

Background

If you own a commercial/rental property or are a CPA, banker, real estate broker, builder, or architect you should know the term “Cost Segregation”. Cost segregation studies are most commonly prepared for the allocation or reallocation of building costs to tangible personal property. Property allocations and reallocations are typically based on criteria established under the Investment Tax Credit (ITC) laws under § 48. Because of the benefit of cost segregation the Internal Revenue Service states “The use of cost segregation studies will likely continue to increase”. (Cost Segregation Audit Techniques Guide – Chapter 1).

How It Works

A cost segregation study identifies and reclassifies personal property from real property assets to shorten the depreciation time for taxation purposes. This, in turn, reduces current income tax obligations. Personal property, or section 1245 property, includes assets that are non-structural elements. Other property such as land improvements can also be depreciated with shorter lives. The primary goal of a cost segregation study is to identify all costs that can be depreciated over a shorter tax life.

What Qualifies for Cost Segregation?

  • Parking Lots (asphalt)
  • Curb, Gutter, Sidewalks
  • Storm Drains
  • Irrigation Systems
  • Retaining Walls
  • Trees, Shrubs, Landscaping
  • Carpet
  • Countertops
  • Cabinetry
  • Blinds/Window Coverings
  • Auxiliary Lighting
  • Specialty Plumbing
  • Window Treatments
  • Wall Coverings
  • Removable Flooring
  • And more!

What Types of Buildings Qualify?

  • Apartment Complexes
  • Assisted Living Facilities
  • Auto and Truck Dealerships
  • Banks
  • Day Care Centers
  • Dental Facilities
  • Distribution Centers
  • Restaurants
  • Retail Stores
  • Funeral Homes
  • Golf Courses
  • Grocery stores
  • Hospitals
  • Hotels
  • Industrial
  • Manufacturing Facilities
  • Marinas
  • Medical Offices
  • Motels
  • Movie Theatres
  • Office
  • Residential Rentals
  • Self-Storage Units
  • Data Centers
  • C-Stores
  • Charter Schools
  • And more!

What Type of Items Are Needed for the Study?

Building Costs, Deprecation Schedules or Settlement Statements, the address of the property, in-service date, and other information such as appraisals related to the building.

How will a Cost Segregation Study Affect My Tax Return?

The deduction created from the cost segregation study will directly reduce taxable income. Tax form 3115 allows taxpayers who placed buildings in service in past years to take the deduction on current tax returns. This means buildings placed in service at any time could qualify.

Example: A cost segregation study on an apartment building with a depreciable basis of $2M finds 32% of costs can be reclassified as shorter-life assets (20% 5-yr, 12% 15-yr). With bonus depreciation rules, all short-life assets are fully depreciated in the 1st year, resulting in an increased deduction of $664,727. Assuming a combined 40% federal and state tax rate, this results in tax savings of $251,345!

Ready to get started? Request a No-Cost benefit analysis today.