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:

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:

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:

Manufacturing 30-50%
Golf Courses 35-50%
Medical Offices 25-40%
Banks 25-40%
Restaurants 23-40%
Grocery Stores 27-37%
Hospitality 25-35%
Retail 15-32%
Multi-family 20-30%
Offices 15-25%
Warehouses 10-17%

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.

Before Study: After Study:
39-Year Straight Line Depreciation MACRS Accelerated Depreciation
Year 1 $24,075 $59,063
Year 2 $38,460 $75,105
Year 3 $38,460 $51,390
Year 4 $38,460 $37,544
Year 5 $38,460 $35,834
Present Value Actual
Year 1 $21,548.08 $21,548.08
Year 2 $23,970.51 $25,888.15
Year 3 $14,062.20 $16,402.15
Year 4 $8,623.84 $10,863.55
Year 5 $7,482.28 $10,179.55
TOTAL $75,687.91 $84,881.49

*Benefits can be even greater on newly constructed assets placed in service between 2008 and 2013, when bonus depreciation is applied.