What is a cost segregation study?
Income tax savings are created by utilizing shorter asset lives (qualifying 5, 7, or 15 year write-off periods) that are normally embedded in a building’s construction or acquisition costs (generally depreciated over 39 years using the slow straight-line method). IRS regulations provide for the use of shorter lives and accelerated depreciation for certain improvements made to commercial buildings. This allows for substantial cost savings for many types of property owners. Through a comprehensive engineering-based approach, your property is reclassified into shorter-life classes based on applicable tax guidelines.
Cost segregation studies are performed by employing engineering and cost-estimating procedures recognized by the IRS. During a cost segregation study, your property is physically inspected, architectural/engineering drawings and specifications are examined for potential asset reclassification, cost data details are analyzed, an itemized list of property units qualifying for shorter-life classification is prepared, direct labor, materials and indirect costs are apportioned, and total costs are reconciled based on the engineering analysis to capitalized project costs. The study is documented and a complete “audit trail” supports cost allocations derived from contract documents and other source data.
What Qualifies for Cost Segregation?
Commercial real estate owners who plan to hold property for a few years can greatly benefit from a cost segregation study. Buried tax savings can be found in:
- New buildings presently under construction
- Existing buildings undergoing renovations, remodeling, restoration, or expansion
- Purchases of existing properties
- Office/facility leasehold improvements and build outs
- Post-1986 real estate construction, building acquisitions, or improvements where no cost segregation study was performed for the year of purchase