Real estate is bought and sold according to state laws, with a purchase or construction price assigned as its value. When it comes to recording the property in the tax books and records of a business, the first step is to allocate a portion of the value to land. Land is non-depreciable. The remaining value is capitalized and depreciated over 27.5 years if it is residential property or 39 years if it is commercial property.
In reality, according to case law, many components of the parcel should be considered personal property or land improvements. These items are allowed, under the internal revenue code, to be depreciated much more rapidly than the main building structure.
A cost segregation “study” provides two things.
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Cost Segregation is a tax strategy that accelerates depreciation deductions by identifying and reclassifying portions of real property to shorter depreciation periods, typically 5, 7, or 15 years. A cost segregation “study” is a report that reverse engineers a building on paper assigning a portion of the purchase or construction cost to each component. Once this process is complete, the study concludes by summing the components that are allowed to be depreciated more rapidly.
Property owners who have constructed, purchased, or renovated any type of real estate can benefit. This includes residential rentals! To maximize the savings from cost segregation you should plan to hold the property in your portfolio for at least a few years.
We conduct a fully-detailed engineering study to identify and reclassify assets. These assets are then assigned to shorter depreciation lives, allowing for accelerated depreciation deductions.
Almost any property used for business purposes can benefit, including apartment buildings, offices, shopping centers, manufacturing facilities, self-storage, residential rentals, STR properties and more.
Yes, Cost Segregation can be applied retroactively by filing a Form 3115, Change in Accounting Method, with the IRS. Our studies include this form, completed in its entirety, at no additional fee.
While all tax strategies have audit risk, a properly conducted Cost Segregation study that adheres to IRS guidelines minimizes this risk. The IRS prefers a fully detailed engineering study since it is the most detailed approach. We only conduct fully detailed engineering studies so historically have withstood audits with very minimal changes.
Typically, a study is performed only once after construction or acquisition, but additional studies can be done if substantial renovations are made.
Key documents include architectural drawings, construction invoices, purchase agreements, and site plans.
Yes, many states follow federal depreciation rules, so benefits can often extend to state tax liabilities.
Potential downsides include the initial cost of the study and a possible recapture of depreciation if the property is sold within a few years of completing the study, though these are usually outweighed by the upfront tax benefits.
Yes, however the basis of the new property is the carryover basis from the exchanged property so is generally much lower than the purchase price of the newly acquired property as shown on the closing statement. In addition, bonus depreciation is not allowed on carry over basis amounts.
However, we complete studies on exchanged properties every month and many still have substantial benefits from cost segregation.
Schedule a complimentary call with us today to review your assets. We will then provide you with a complimentary estimate of benefit with a projected return on investment from the tax savings.
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