December 5, 2013
Real Estate Owners Benefit from Cost Segregation Studies
If you are purchasing real estate, constructing a new building, expanding or rehabilitating an existing building, or relocating with leasehold improvements, a cost segregation study may reveal that your property can generate bigger tax savings than you realize.
A cost segregation study is a strategic tax-saving tool that examines all costs associated with the acquisition or construction of a building and properly classifies them as either real or personal property. The objective is to shift property (and the associated dollars) from categories which have long tax lives to categories which have shorter tax lives so they can be depreciated on an accelerated basis (greater depreciation during the early years of the asset's life). This minimizes taxable income and thus lowers overall tax obligations. The result is improved cash flow. Real estate entities who own substantial commercial real estate could defer hundreds of thousands of dollars in tax deferments. Current law allows property owners to capture depreciation retroactively, as far back as 1987, providing the opportunity for even more substantial tax benefits.
The types of properties with the best savings potential include (but are not limited to): office buildings, retail stores and shopping centers, industrial and manufacturing plants, hotels/motels, apartment complexes/buildings, restaurants and medical facilities.
The process of a Cost Segregation Study is thorough, detailed and in-depth but not intrusive and uses an engineering-based approach (as specified by the IRS). The study examines components such as a building's walls, flooring, ceilings, plumbing, electrical, lighting, telecommunications, heating and cooling systems. It also allocates "soft costs," such as architect and engineering fees, for all components of the building. The analysis requires engineering and valuation skills in order to be effective and supportable. This means whoever performs the analysis must have knowledge of elements such as construction methods, materials, costs, income tax regulations, court cases, revenue rulings, and procedures.
Cost segregation does not eliminate the taxes owed. Instead, taxes owed are deferred to later years which can result in significant savings today.