What is cost segregation?
Cost segregation is a powerful, IRS-accepted tax-planning strategy used to accelerate depreciation deductions, producing significant tax deferrals and increasing cash flow.
How it Works
Your real estate holdings constitute a huge capital investment. With engineering-based cost segregation studies, you can realize significant tax savings by segregating the personal property components of your project; accelerating your tax deduction over five, seven, or 15 years versus the typical depreciation period of 27.5 or 39 years. When prepared correctly, a cost segregation study can also be an excellent asset management tool.
Since 2001, the U.S. Federal government has provided tax incentives for owners who are constructing or improving their real estate. Qualified leasehold, restaurant and retail improvements, as well as bonus depreciation benefits are available. Our team of engineers and tax experts proactively ensure any additional benefits are realized as part of our Engineering Analysis.
A cost segregation study performed on a property placed in service in years past, where a tax return has already been filed, is known as a look-back study. A look-back study allows you to claim a catch-up tax deduction. The catch-up, taken in a single year, is equal to the difference between what was depreciated and what could have been depreciated if a cost segregation study was performed. These benefits can be quite significant and the change is made without filing an amended tax return. We simply file a Form 3115 (Change in Accounting Method) with the cost segregation study attached.
The IRS allows taxpayers to use a cost segregation study to adjust depreciation on properties placed in service as far back as January 1, 1987.
Our team of tax professionals works with specially trained engineers who have the skills and expertise required to produce high-quality studies that withstand IRS scrutiny. On average, a cost segregation study can allocate 20 – 40% of the depreciable cost basis of a property to an accelerated recovery period. Occasionally the allocation is much higher.
*The results above are averages for illustrative purposes only and should not be relied upon for calculating depreciation. Results will vary depending on the facts and circumstances of the subject property.
Consider having a cost segregation study performed if you:
- Are purchasing real estate;
- Are beginning a construction project;
- Are expanding an existing facility or undergoing major renovations;
- Are making significant leasehold improvements; or
- Have completed any of the above in the past.
As an owner of commercial real estate you can likely benefit from a cost segregation study. If you recently built or renovated a property, you may also be eligible for special incentives.