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WHAT is a Cost Segregation Study?
Property owners of commercial and investment real properties typically depreciate their real estate holdings over 39 years or 27.5 years (residential property). However, in recent years, the IRS has provided guidelines to identify certain components of a building and reclassify them as shorter-life assets. The reclassification could mean the property owner can take larger tax deductions over a shorter period, i.e., tax savings and improved cash flow.
HOW does a Cost Segregation Study work?
An engineering-based Cost Segregation Study, conducted by the IRS' preferred method, consists of a detailed examination of construction and accounting records and an extensive site inspection by a professional consultancy comprised of accountants and engineers with prior cost-segregation experience. Then, the study will identify the specific components of a building that can be reclassified as 5, 7, and 15-year life assets. Some examples of such components include accent lighting, carpet, cabinetry, floor covering, signage, paving, sidewalks, landscaping, specialty plumbing, electrical and HVAC equipment.
WHAT are the benefits of a Cost Segregation Study?
- Accurately classify assets and accelerate the depreciation deduction
- Time-Value of Money, i.e., a tax deduction is historically worth more today than it will be in the future
- Increase cash flow immediately
- Claim "look-back" depreciation on previously misclassified assets without amending previously-filed tax returns
WHAT do you need to conduct a Cost Segregation Study?
- Blueprints and specs
- AIA G702/G703 (contractor's final application for payment)
- Any relevant invoices that capture cost breakouts for qualifying assets (especially when AIG G703 was not prepared with sufficient details), invoices for additional items not included in the general contract
- General Ledger that contains all property accounts, including any work performed on the property outside of general contract work
- Summary of all construction related indirect costs - architectural and engineering fees, bonds, permits, legal fees, construction period interest, etc.
- Summary of other purchases related to the project - fixture and equipment to be installed, etc.
- Settlement statement
- Listing of closing costs paid outside of closing
- Blueprints and specs if available
- Property appraisal report
- Renovation schedule/construction draws
- Property appraisal report
- Blueprints and specs if available
The building was placed into service in a prior tax year and the tax return has already been filed
- Any of the items listed above in an applicable situation
- Depreciation schedule showing the building from the most-recently-filed federal income tax return
We prepare certain statements and attachments supporting the §481 (change in accounting method) adjustment, if applicable, and work closely with your CPA or controller in order to assist them in implementing this tax-saving strategy.