What is Cost Segregation?

Cost Segregation is an engineering-based, tax savings tool to help companies that have acquired, renovated, constructed, or expanded real estate to reduce current income tax liabilities by accelerating depreciation deductions for qualifying components.

This is tax strategy that should be considered by nearly every taxpayer who owns, is constructing, renovating or acquiring real estate. By using an engineering- based approach to identify assets within a building that can be reclassified into much shorter depreciation recovery periods than the building itself, significant tax savings can be achieved.

Generally, an entire building would be classified with a straight-line depreciation cycle of either 39 years for commercial and industrial property or 27.5 years for residential-rental property. By applying a cost segregation study, you can maximize your inherent tax benefits by identifying, classifying, and segregating the personal property components of the building. This results in accelerated depreciable lives of 5, 7 and 15 years, thus saving thousands of tax dollars.

For example: For a new purchase placed into service the same year, $2,000,000 was reclassed to a 7-year life. In the first year alone that garnered a tax savings of $103,192. Over a 5-year period the one-time cost segregation study saved the owner over $525,000.

Who Can Benefit From Cost Segregation?

Cost segregation studies have become an increasingly valuable tax strategy that should be considered by virtually every taxpayer who owns, is constructing, renovating or acquiring real estate.

Clients are surprised to learn that most properties that have been constructed, purchased or renovated since 1987 qualify for this tax benefit. From apartment buildings, assisted living/nursing homes, auto dealerships, office buildings, restaurants, hotels, medical buildings to retail spaces,  Scarpello Consulting works with a wide range of building types and ownership structures.

An additional benefit of a Cost Segregation study is the proper identification of Units of Property (UoP) in accordance with the IRS Repairs and Maintenance Regulations allowing for future disposals of structural components.

To determine if your building or project is a candidate for a Cost Segregation Study, ask yourself the following:

  • Is the purchase price of the building at least $750,000?
  • Have we purchased, constructed or renovated any property since 1987?
  • Do we plan on keeping our property for the next few years?
  • Do we have taxable net income?

We also routinely partner with a client’s CPA or tax professional to seamlessly work together to identify tax saving opportunities. Read more how we can partner with each other HERE.

When should we consider a Cost Segregation Study?

A Cost Segregation Study can be conducted at the time a property is purchased, renovated or constructed. If you placed properties in service in previous years a Cost Segregation study can still be performed in accordance with Revenue Procedure 2011-14 without amending returns.  Any missed depreciation from previous years can be taken in the current year through the filing of IRS Form 3115.  Scarpello Consulting also assists clients that are in the feasibility phase of a construction project to identify potential tax savings.

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IRS SUPPORTS COST SEGREGATION

Although cost segregation has a long history, the basis for today’s studies were established by a US Tax Court decision in 1997. Recently, the IRS has continued to validate, uphold and improve the value of cost segregation studies by enacting the 2002 and 2003 Tax Acts. For those that should conduct a retroactive study, the IRS now allows the benefits to be recognized in the current year, rather than over a four year period without filing an amended return.

PROPERTY TAX

As state tax coffers shrink (while property tax bills rise), clients come to Scarpello Consulting to work with professionals who can help ensure that property tax is fair, reported accurately and tax assessments are correctly levied. Scarpello works with clients in a variety of businesses from manufacturing, healthcare, construction, retail and hospitality to multi use properties.

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Scarpello Consulting will provide a no obligation benefit analysis to determine your tax savings.





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