Frequently Asked Questions
What is a Cost Segregation Study?
A Cost Segregation Study is an engineering analysis that identifies, segregates, and reclassifies all building components that qualify for shorter depreciable lives. This allows for costs that were originally classified as residential or commercial real property categories, with a depreciable life of 27.5 or 39 years, to now be re-classified into personal property or land improvement categories with shorter depreciable lives of 5, 7, or 15 years. By accelerating depreciation, you can enjoy tax deductions right now that you'd otherwise have to wait years to receive.
What properties qualify for Cost Segregation?
Any commercial building acquired, built, or renovated on or after January 1, 1987 qualifies for Cost Segregation. However, buildings that were purchased more than 11 years ago do not have enough tax advantage for cost segregation. Also properties that are owned by the government and non profit don't qualify.
Does the IRS allow cost segregation?
Cost segregation is an IRS approved depreciation process for individuals or companies that own commercial buildings. The IRS code allows owners to take the accelerated depreciation on the building according to the IRS guidelines.
Why hasn't my CPA already done cost segregation?
Most CPA's do not view cost segregation as an accounting mandate like paying your taxes. CPAs are not engineers and may not have an in-depth knowledge of the types and range of depreciation lives of commercial property components. Cost segregation correctly accounts for the various components of commercial property so depreciation can be accurately calculated. A Cost Segregation study requires engineering expertise. While an accountant may have knowledge in taxation, an engineer is needed to interpret blueprints, assess construction methods, inspect the building, and estimate components.
What do I have to do to take advantage of cost segregation?
You must retain a qualified cost segregation firm to do an analysis of your building. Click here for a Free Complimentary Property Analysis.
How does a cost segregation study work?
Our qualified engineers perform a detailed analysis to properly identify building components and improvements that will be reclassified to take advantage of accelerated depreciation. Building costs are generally classified into three categories, (1) Tangible Personal Property, (2) Land Improvements and (3) Real Property. Each has a different depreciation recovery period and method under the Modified Accelerated Cost Recovery System (MACRS). Certain building components can be depreciated over 5, 7, and 15 years instead of 27½ or 39 years.
How much does this study cost?
We charge a fixed fee for cost segregation studies and you know the total cost of the study up front. The fee is based on size and complexity of the project. Half of the fee is collected upon engagement and half at the time the study is delivered. However, no cost at all is involved unless you are going to save money. Let us perform a no cost, complimentary property analysis to determine if you will save money by using cost segregation. Then you are free to decide if you want to incur the cost based on economic advantages.
What information is needed to complete a cost segregation review?
While each study differs, we generally request:
- Date the building was purchased or built
- Purchase price or cost of construction (excluding land)
- Cost of significant improvements or expansion
- Type of building (office, warehouse, medical, apartment building)
Is cost segregation a red flag for an audit?
No, it accurately applies IRS rules and regulations. Using cost segregation is considered a conservative approach to more accurately reflect taxable income. In fact, our report provides supporting documentation upon which tax return preparers can rely. We can also provide your tax preparer guidance for completing the appropriate federal tax form 3115.
How much can be saved?
Every building is different. Savings depend on many factors including: purchase price, building use, construction methods used, design, and year acquired. Generally, the savings is roughly 25 to 35 times the cost of the Study. A Study is generally beneficial if the property is not operating at a loss. For a more accurate estimate, you can Request a Free Analysis and Proposal.