Cost Segregation Study | Frequently Asked Questions

What Is Cost Segregation?

Cost segregation is a strategic tax planning method that accelerates tax depreciation deductions and defers federal and state income taxes. Real property is often depreciated over 27.5 years or 39 years, but certain building components such as electrical installations, plumbing, and mechanical systems and finishes qualify for 5, 7 or 15-year depreciation lives. Studies can also separate out personal property assets, which cannot be depreciated for tax reporting purposes.

Who Qualifies for Cost Segregation?

Companies that construct, renovate, or acquire commercial or residential real estate see the most benefit from cost segregation, but any company that makes building upgrades that exceed $500,000 may also be good candidates for cost segregation. The ideal project for cost segregation involves newly constructed, acquired, or renovated commercial and residential properties with a depreciable basis of more than $1 million.

When Should I Get a Cost Segregation Study?

Ideally, a cost segregation study is performed in the year of the acquisition, construction, or renovation of a property. Businesses can also have look-back studies where cost segregation is performed on buildings built, acquired, or renovated within the past 10 years. During a look-back study, tax professionals identify previously missed deduction opportunities.

What Is the Cost Segregation Process?

Certified tax professionals and qualified engineers inspect the property, determine the value of each component, and assess the proper tax classifications. Tax professionals then work with business owners to determine how and when to use the accelerated depreciation deductions to receive the maximum tax benefit.

What Is the Benefit of Cost Segregation?

The average net present value savings yields a return on investment of $15 of tax savings per dollar spent in fees.

How Can I Find Out If a Cost Segregation Study Is Right for Me?

Connect with a Cost Seg Specialist

The Benefits of Cost Segregation Studies: Tax Advantages for Commercial Real Estate Investors

Even with the pandemic, economic ups and downs, and rising interest rates, commercial real estate remains an appealing investment.

Building owners are constantly on the lookout for ways in which they can decrease the taxable income attributable to the operations of their property. Over the last few years, one of the ways they have been able to do this is through accelerating the depreciation that relates to their building and improvements. While most may know that accelerated depreciation is available on purchases of equipment in the form of bonus depreciation, they may not realize that there is also a tool available that can allow them to accelerate items currently grouped with building and improvements. This tool is known as a cost segregation study. This option has been available for many years, but the recent passage of the CARES Act has significantly increased its benefit.

A cost segregation study is when the components of a building are analyzed to determine if they can be reclassified from real property to personal property. This will usually occur when property has either been purchased or constructed and is performed by a consultant with a background in engineering and construction who specializes in this type of work. Normally, when a building is acquired or constructed, the depreciable life is 39 years. Through their analyses, cost segregation consultants can pick out items that should have a shorter depreciable life. The consultant may be able to pull out certain components and reclass their depreciable lives to 5, 7- or 15-year property, allowing for a significantly shorter depreciation period. Although the ideal time for a cost segregation study to be performed is the year of purchase or construction, cost segregation can be performed for any building purchased or built after 1987. Once the study is complete, the consultant prepares a report detailing their findings and any additional forms that need to be filed. Tax professionals then work with the report and the consultants to apply the findings to assets on the tax return and increase the depreciation expense for the building.

Why is this important now? When the CARES act was passed in March of 2020, the benefit of a cost segregation study increased significantly. Prior to the passage of the CARES Act, improvements to the interior portion of a nonresidential building (known as qualified improvement property) were required to be depreciated over 39 years. The CARES Act now allows for these improvements to be classified as 15-year property. Not only does that provide a much shorter depreciation period, it allows the improvements to qualify for 100% bonus depreciation, provided no election has been made to be exempt from interest limitations under the real estate tax law related to interest. Improvements made by a seller of a building cannot be treated as qualified improvement property by the buyer. To qualify, the improvement must be made by the taxpayer. In some cases, this significant change could enable a consultant to take property that was being depreciated over 39 years and instead get a full write off in the current year. Building owners would undoubtedly appreciate that result!

Overall, a cost segregation study can be extremely beneficial to building owners under the right circumstances. Speak with your Marks Paneth tax advisor to determine the best strategy for your real estate investments.

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The Cares Act Makes Cost Segregation a Smart Tool for Building Owners

While most may know that accelerated depreciation is available on purchases of equipment in the form of bonus depreciation, they may not realize that there is also a tool available that can allow them to accelerate items currently grouped with building and improvements. This tool is known as a cost segregation study. This option has been available for many years, but the recent passage of the CARES Act has significantly increased its benefit.

Frequently Asked Questions About Cost Segregation