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Cost Segregation Studies

Cost Segregation for Real Estate

Depreciation continues to be one of the most significant opportunities to reduce your federal income tax liability. Without cost segregation, however, many companies fail to fully capture these benefits.

The new building on your balance sheet - or the property you just acquired or renovated - may generate more cash flow benefits than most companies realize. That's because the values of short lived assets contained in construction or acquisition cost documentation are often hidden from view. Cost segregation studies, a service that uncovers these hidden assets, can be a potent tool, bringing to light substantial tax savings made possible by accelerated depreciation.

You have an opportunity to maximize your depreciation benefits under current tax law if you are:

Building a new facility
Renovating, remodeling or expanding an existing building
Purchasing or acquiring real estate
Relocating and investing in leasehold improvements
Not depreciating your current fixed assets properly

Why pay more taxes than you need to?

The results of a cost segregation study, depending on effective tax rates and discount rates, can save clients, on a net present value basis, $210 for every $1,000 of property reclassified from long life to shorter life depreciation categories.

A quantity survey approach

In the absence of a cost segregation study, for example, it is difficult for a company to separate all of the personal property and land improvement costs, as well as indirect costs, from the total cost of the building. A cost segregation analysis breaks down construction and acquisition costs and allocates them to specific categories: tangible personal property, land improvements and real property. The result - all such property is subject to 39 year straight-line depreciation (27.5 years for residential real property) - resulting in a substantially higher tax liability.

When you remodel or build

Under the Modified Accelerated Cost Recovery System (MACRS), a substantial percentage of a typical building's cost basis may be assigned to shorter cost recovery periods, generating tax savings that result from accelerated depreciation. As examples, we have reclassified from 5 percent to 25 percent of costs in residential and commercial properties and 40 percent or more of industrial or process-oriented construction costs using these cost segregation techniques.

Design Coordination

Coordination of building design, construction documentation, and tax issues is another very effective way to generate cash flow benefits in new construction projects. As with cost segregation studies, pre-construction building design and documentation coordination must meet the scrutiny of the IRS. Our design coordination services provide the authority and the documentation to substantiate opportunities for accelerated depreciation of fixed assets by assisting your project team in designing into the facility assets that can take full advantage of the prevailing tax saving opportunities in fixed asset accelerated depreciation.

Our consultants are design professionals who understand the relationship of the design professional to the owner and the project. We respect the design process and offer our suggestions not as edicts, but as opportunities to create more value from the project by considering specific tax issues related to building design, materials selection, and building systems design.

Every project is unique and our tax depreciation professionals are available to discuss timing and benefit issues early in the project-planning phase.

When you purchase a building

As you purchase existing buildings, it can be difficult to precisely establish the optimal cost recovery periods for all the assets acquired. A purchase cost study, with a cost segregation emphasis, makes it possible to substantiate the cost basis of each item eligible for accelerated depreciation.

Economies of scale

Cost segregation studies have a high level of detail, providing benefits that can go beyond their primary purpose of creating Federal tax benefits. We can extract information, for example, to help with insurable values and property records accounting issues for financial, tax and property tax reporting.

Leveraging your tax savings

Cost segregation studies also may be essential to support deductions under investment tax credits or other tax abatement programs offered by states and local governments.

A number of states offer investment tax credits on new manufacturing equipment and related qualifying construction that may be applied as an exemption to the taxpayer's sales and use tax or income tax.

Supporting the deduction can be complex. It may involve sifting through construction costs and complying with stringent qualification criteria.

For more information contact Joseph Strickland, Jr., RA

Joseph Strickland's Bio

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