Any commercial property owner will want to strongly consider a cost segregation study when acquiring or developing a property. Cost Segregation can be one of the most advantageous tax strategies available to property owners. By consulting with our commercial real estate firm, The Frances Group, you can determine if a cost segregation study will be right for you. Keep reading to learn more about the benefits of cost segregation studies.

What is Cost Segregation?

Cost segregation is an alternative tax strategy that separates out real property assets from personal property assets for tax reporting purposes. Generally, a commercial property will depreciate over a 39-year period using the straight-line method for depreciation. However, utilizing a cost segregation strategy and classifying out your qualifying assets can reduce current federal taxable income and allow you to take the maximum deduction permissible under the tax code.

What is a Cost Segregation Study?

While conducting a cost segregation study, your real estate firm may work with a team of engineers and architects to classify your assets into one of four categories, (1) personal property, (2) land improvements, (3) buildings, or (4) land. From there, your real estate professionals can determine which assets may qualify for special tax benefits.

The assets you hold which classify as land improvements or personal property will have shorter useful lives under the accelerated methods of depreciation set forth in the internal revenue code. Personal property tends to have a useful life of 5-7 years with land improvements having a useful life of 15 years, compared to the straight-line depreciation of 39 years mentioned above.

Is a Cost Segregation Study Worth It?

Yes. If done right, a cost segregation study can accelerate depreciation deductions leading to lower taxable income and a cheaper tax bill. This will allow property owners to increase their cash flow and reinvest their savings into growing their business.

Hire a Professional

It is important to keep in mind that cost segregation studies should only be conducted by experienced and qualified individuals who will issue a report in support of their classification of assets. If you come up against the IRS in an audit you will need a well-documented and professional report prepared by a qualified individual. Otherwise, you could end up in tax court facing serious consequences and dishing out the money you saved to pay for lawyers. Contact us directly here.

At minimum, a cost segregation study should include a narrative of the property, a detailed cost analysis of qualifying assets, photographs of the property, as well as a methodology overview for any assumptions used including citations to the applicable tax laws.

*Remember to consult with an experienced real estate firm before undertaking a study and keep in mind that cost segregation is governed by federal law and may not qualify in your state. Contact us for a consultation