What is Cost Segregation?
The principle goal of a cost segregation study is to increase cash flow from constructed buildings, purchased properties and renovations by accelerating depreciation expense deductions. Through this analysis, the components of a building are reclassified into proper class “lives” according to government legislation, case law, and IRS revenue rulings/procedures. Substantial tax savings can be achieved by accelerating depreciation deductions.
Why have I not heard about Cost Segregation before?
Though it has been around, in its current form, since 1987; Cost Segregation was, for some time, almost solely offered by Big 5 accounting firms and a handful of large real estate consulting companies who serviced only the largest of clients. There were very few qualified practitioners and, for small to medium size taxpayers, the service was cost prohibitive. Within the last few years, however, Cost Segregation has become available, at a very reasonable cost, to smaller companies and individual property owners.
How does a Cost Segregation work?
Consultants will gather documentation, such as construction plans, contractor invoices, depreciation schedules, etc. From these documents, we will identify the qualifying items and associated costs to be reclassified into shorter-life categories. One of our consultants will visit the property to compare what was actually built against the plans, and take photographs of the property. Results are aggregated and presented in a report, along with relevant case law data, definitions, photo documentation, and calculation details.
Is this all legal?
Absolutely. Over 1000 IRS revenue rulings and court cases provide the necessary guidelines for proper conduction of Cost Segregation studies. The IRS has also recently issued an Audit Techniques Guide that defines a quality Cost Segregation study.
What sort of benefit might I expect?
The benefit of a Cost Segregation study lies in the timing of tax payments. Assuming a 35% Federal tax rate, an 8% discount rate, half-year convention, and no bonus depreciation, for every $1,000,000 of property reclassified from 39 years has a cumulative present value of tax deferral equaling approximately:
- $195,000 for 5-Year Property
- $178,000 for 7-Year Property
- $108,000 for 15-Year Property
In other words, the benefit is approximately $.19 for every dollar reclassified to five years from thirty-nine years.
For Additional Information Call:
Tom W. Childers | Childers Real Estate Services, LLC | 206.579.6202 |
