Real Estate Cost Segregation Study

Real Estate Cost Segregation Study

Defining Cost Segregation:
Cost segregation is a process for identifying personal property assets that are grouped with real property assets and then separating them for tax reporting purposes. Personal property assets are normally classified as a building’s non-structural elements, land improvements, and indirect construction costs.
A cost segregation study reclassifies personal property assets, shortening the depreciation time for taxation. Reducing the depreciation time reduces current income tax obligations.  The goal of the study is to identify and separate all costs related to the abovementioned personal property assets that can be depreciated over a short tax life. The tax life for a non-residential real estate property is 39 years, while a cost segregation study identifies assets that can be depreciated over a shorter period of time (usually 5, 7, and 15 years).

Property eligible for a cost segregation study includes buildings that have been purchased, constructed, expanded or remodeled since 1987. Studies are cost-effective for recently constructed buildings bought or remodeled at a cost greater than $200,000, however, a study can also identify retroactive tax deductions for older buildings. Retroactive tax deductions can produce short benefits as a result of “catch-up” depreciation. Some buildings that are studied are: office buildings, restaurants, hotels, stadiums, and malls.

Cost segregations specialists perform nonintrusive engineering studies of a building’s walls, floors, ceilings, plumbing, electrical, heating and cooling systems, and communications.

Construction engineers analyze architectural blueprints and mechanical schematics to separate the structural, electrical, and mechanical components from personal property. A construction engineer is a better candidate to conduct a cost segregation study than someone with no engineering or construction knowledge. Not only are they more knowledgeable about construction, they are also trained in cost estimating and allocation and are better acquainted with applicable law.

In addition to providing lower taxes, cost segregation generates a number of other useful benefits.

  • By adjusting the timing of deductions, segregation maximizes tax savings. Shortening an asset’s life speeds up depreciation expense, which decreases tax payments during the early years of the property’s lifespan. The result of all this? Cash is released for investment or any current operating need.
  • Creating an audit tail helps resolve IRS inquiries early on and avoids an unfavorable audit adjustment.
  • Tax payers can redeem retroactive savings on properties constructed after 1987.
  • Cost segregation can reduce real estate tax liabilities by identifying certain sales.

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