What Is A Cost Segregation Study?
A Cost Segregation Study (CSS) is an analysis that reclassifies or segregates real estate components and improvements between real and personal property to accelerate the depreciation periods from 39 years to 5, 7, or 15 years. Through cost segregation studies and with our associated section 179 depreciation survey, your building can qualify for substantial tax deductions.
When Should A Study Be Done?
Ideally, a deduction calculator study should be performed in the tax year that the building or improvements are placed into service. However, IRS revenue procedures allow taxpayers to “catch up” on the depreciation which was not claimed from the first day the property was put into service, without amending the prior years’ tax returns.
How Does A Cost Segregation Study Work?
Building costs are generally classified into three categories for federal income purposes :
(1) Tangible Personal Property, (2) Land Improvements, and (3) Real Property.
Each of these has a different recovery period and method under the Modified Accelerated Cost Recovery System (MACRS). An analysis is performed by a licensed deduction calculator with in-depth knowledge of construction methods, materials, and building components to properly identify the assets that will be segregated. This reclassification takes advantage of accelerated depreciation. The study typically takes 3-4 weeks after the site visit to complete.
Business or individuals who have acquired, constructed, or renovated commercial property after December 31, 1986. Cost Segregation Studies can be performed on buildings with a minimum value of $750,000. Triggering events include:
- New building construction
- Purchasing an existing building
- Renovating or expanding an existing property
- Mergers & Acquisitions
- Purchasing disclosures & “Like kind” exchanges
Benefits Of a Cost Segregation Study
Studies identify material reductions in your federal and state tax liabilities for the year of the study and the next decade. The deduction calculator estimates benefits in typically hundreds of thousands of dollars, immediately increasing cash flow through accelerated depreciation deductions on federal and state income taxes.
- “Catch up” depreciation in the current tax year
- Justification for reduction in the real estate property taxes
- Justification for the reduction in property insurance costs
Studies identify the components of a building, which can be classified as personal property versus real property, for write-off versus capitalization prior to demolition and rehabilitation.
Why The Benefits Are Overlooked
Commercial property owners and their tax professionals may not be aware of the magnitude of the tax savings available through cost segregation and section 179 depreciation. These benefits are not widely used, nor are they common knowledge. A full understanding requires familiarity with deduction processes, numerous IRS sections beyond section 179 property, regulations, revenue rulings and case laws.
Considerable expertise and training are required for licensing to perform these intricate studies. In addition to basic reporting requirements, high quality CSS extract precise detail from drawings, contractor invoices, payment applications, as well as the property itself. Many buildings are purchased decades after the original construction. Therefore, it is often thought that Cost Segregation Studies can’t be performed due to difficulty obtaining all legacy information, data, and architectural drawings.
Today, cost segregation is one of the most valuable strategies available to commercial building owners. It offers owners the opportunity to defer taxes, reduce their overall tax burden, and improve current cash flows by freeing up capital.
However, cost segregation is the least understood and frequently used tax strategies.
With over 50 years of shared experience, at National Cost, we’ll put your cost segregation confusions to rest. Our team can help you in the following ways:
- Specialized team of cost segregation professionals
- Documentation as per IRS approved guidelines
- Stress-free process with helpful correspondence
- Ability to handle time-sensitive and complex studies
- Efficient completion of the cost segregation process using advanced proprietary technology
- Provide roadmap for future purchases