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The key to unlocking hidden savings in commercial property.
What is Cost Segregation?
Cost Segregation is a study that analyzes building assets and classifies them in order to identify those that qualify for an accelerated tax rate. A cost segregation analysis typically results in increased depreciation benefits by differentiating long-life property assets from short-lived assets for federal income tax purposes. Some of the key benefits include improving short term cash flow, identifying costs to be expensed, detailing fixed asset records, and creating a solid record for the IRS in terms of identifying assets. Cost segregation can also be used to lessen real estate tax liabilities, as well as identify sales and use tax savings.
Property types that can be analyzed may include:
- Golf Courses
- Data Centers
- Offices/Business Centers
- Shopping Centers
- Other “Specialty Use” Properties
Why should a cost segregation study be performed?
Property owners who have recently acquired, constructed, renovated, or expanded new real estate assets can use a cost segregation study to help recover their capital investments quickly, as opposed to slowly over the standard tax-life of real property.
Results of a cost segregation can help a tax payer in the following ways:
- It can maximize tax savings by adjusting the timing of deductions. Depreciation expenses are accelerated and tax payments will be lessened in the earlier stages of owning the property, when the tax life is shortened. By shorten-ing the tax life and allowing these larger depreciation expenses, the tax payer frees up cash flow for further in-vestment opportunities or other business needs.
- Cost segregation also helps document costs, and provide an audit trail for the IRS. By performing a cost segregation study, assets can be properly documented at the earliest possible time to help solve IRS inquiries, thus provid-ing an audit trail.
- Playing Catch-Up: Retroactivity. Since 1996, taxpayers can capture immediate retroactive savings on property added since 1987. Previous rules, which provided a four-year catch-up period for retroactive savings, have been amended to allow taxpayers to take the entire amount of the adjustment in the year the cost segregation is completed. This opportunity to recapture unrecognized depreciation in one year presents an opportunity to perform retroactive cost segregation analyses on older properties to increase cash flow in the current year.
- Additional tax benefits. Cost segregation can also reveal opportunities to reduce real estate tax liabilities and identify certain sales and use tax savings opportunities.
What is Eligible?
Any property that has been recently acquired, constructed, renovated, or expanded since 1987. Typically assets worth over $200,000 will show a benefit from a study. The best time to perform a study is as soon construction is complete, or quickly before or after a building has been pur-chased. Older buildings can also benefit from what’s called “catch-up” depreciation. In this case, a property owner that has constructed or acquired their property in the past catch up their savings and capture it in the first year, which can lead to a huge first year tax savings. This is typi-cally beneficial on a building that is less than 7 years old.
Typical Reallocation by Property Type:
Example of Potential Benefit:
Small Retail/Strip Mall, Purchased for $2,000,000, land value of $500,000, placed in service June 2012. Assumed mid-year convention. Client tax rate of 40%, discount rate of 8%. Assumed 12% re-class to 5-year personal property, 15% re-classed to 15-year land improvements.
*Benefits can be even greater on newly constructed assets placed in service between 2008 and 2013, when bonus depreciation is applied.