Cost Segregation Studies - one
of the hottest tax planning strategies for anyone owning non-residential
(commercial) real estate. However, most owners and CPA’s are unaware of
how many practical applications there are for this valuable tax planning
tool.
IRS Approved - Cost segregation is an IRS-approved
technique that allows the owners of new and existing commercial property
to accelerate depreciation, which typically results in a significant decrease
in income tax liability. An engineering-based study will result in a report
that will identify components of a building that can be re-scheduled from
39-year “real property” to 5 and 7-year “personal property” (non structural
elements) and 15-year land improvements. Offices, hotels, medical facilities,
automobile dealerships, restaurants, factories, retail property, warehouses
and others are rich in personal property - typically between 20 and 40% can
be re-scheduled.
The tax savings are retroactive! If a property were
built or acquired five years ago, all deductions would be available THIS
YEAR, resulting in immediate cash for the owner. Retroactive benefits are
available on properties back to 1987 (yes, 1987). And, again, an owner can
take the full amount of an adjustment in the year the cost segregation is
completed. Hundreds of components can be accelerated; stepped-up electrical
and cabling subsystems, special use plumbing and HVAC, decorative and theme
elements and much more. Outdoor components include paving, awnings, patios,
sidewalks, curbing, accent and parking lot lighting, fencing, signage, trees
and shrubbery, sprinkler systems, etc. Although many CPA’s provide “component
depreciation” for their clients, component depreciation does not include
many of the items identified by an engineering study (which is required by
the IRS for cost segregation).
Cost Segregation is a specialized construction engineering
and tax study that evaluates real property assets (minus land cost)
that are eligible to be reclassified as personal property for purposes of
accelerated depreciation. Real property assets (building and structural elements)
are reclassified to personal property to maximize the shortest possible depreciable
life which enables the real estate owner to maximize their tax depreciation
reducing income tax obligations. This allows an owner to accelerate the depreciation
of their building and/or renovation into five-, seven- and 15-year categories
rather than the conventional 27.5 and 39.5 year schedules.
Cost Segregation studies can include expansion and renovation
projects and leasehold improvements of rented/leased space. PSA represents
one of the largest engineering firms in the country that provides independent
cost segregation services. Over 5,000 studies have been completed on properties
ranging from $200,000 to $180 million and all are compliant with IRS guidelines
and regulations.
Key Benefits Of A Cost Segregation Study
- IRS Approved (IRS Procedure 2004-11)
- Applies to Buildings Purchased, Constructed, Renovated, or Expanded
After 1987
- Maximize Tax Savings by Adjusting the Timing of Deductions
- An increase in depreciation expense can yield a significant decrease
in income tax liability
- Tax payments are decreased during the early stages of a property’s
life
- Improved ROI in Early Years of Ownership
- Increases Positive Cash Flow
- Captures the “Time Value” of Money as a Result of Earlier Depreciation
- Can Take the Full Amount of an Adjustment in the Year Cost Segregation
is Completed
- Retroactive Savings Can Be Taken In The Current Tax Year
- Can Generate More Than a 10-to-1 Return on the Cost of the Study
- A Significant Step Above “Component Depreciation”
- Creates an Audit Trail to Help Resolve IRS Inquiries
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