Cost Segregation Studies are not all the same!

Ideally, these cost segregation studies combine forensic engineering and accounting techniques to identify building costs that are properly allocable to tangible personal property (Section 1245) rather than real property (Section 1250). This could potentially allow you to accelerate depreciation deductions which reduce taxes and boosts cash flow considerably.

IRS rules generally allow businesses to depreciate commercial buildings over 39? years or 27? years for residential properties. Most often, a business will depreciate all of a building’s structural components like doors, walls, windows, HVAC, electrical, plumbing, and roofing as well as the whole building itself.

Personal business property such as furniture, fixtures and equipment (FF&E) is also eligible for accelerated depreciation, but usually over five or seven years. Land improvements including sidewalks, curbs, monument signage, fences, outdoor lighting and parking lots are depreciable over 15 years.

It is not unusual for businesses to classify most, if not all, of a building’s acquisition or construction costs to real property. They often overlook the opportunities to allocate costs to shorter-lived personal property or land improvements. As an example, computers and carpeting have obvious distinctions between real and personal property, but often the line between the two is less clear. Assets that appear to be part of a building may be personal property, like floor coverings, movable partitions, awnings and canopies, dedicated electrical or plumbing systems, window treatments, and decorative lighting to name a few.

Although the relative costs and benefits of a cost segregation study are “facts and circumstances” based, it can be a valuable investment. Consider this - five years ago a business acquires an office building for $1,000,000. If the entire purchase price is allocated to 39.5-year real property, the business is entitled to claim $24,610 (2.461% of the $1,000,000) in depreciation deductions the first year. However, a forensic cost segregation study may reallocate about 25% to 5- & 15-year property (accelerated depreciation). This effectively increases the total available depreciation deductions to $147,142 in the current year because you receive 200%DB depreciation on the short-lived assets in addition to the straight-line depreciation from the building itself!

Listen, this is a complicated engineering and tax matter. Employing only a qualified cost segregation firm that is forensic in nature will provide you with the maximum tax savings at no risk of audit. Navigating the tax code for real estate depreciation is what we do daily and it is ALL we do. Why not find out how much you can save on your tax return by getting a free, no-obligation benchmark analysis for your commercial or residential rental property? Click here for your free quote today!

It's your money, why wait!