Utilizing Cost Segregation to find tax benefits for commercial property owners

For Federal income tax purposes, building costs are generally classified into three categories. Under the applicable depreciation method used, called Modified Accelerated Cost Recovery System (MACRS), each category has a different depreciation recovery period and method:

Property Classification         Years                   Depreciation Method

Tangible Personal Property 5 or 7 Years          200% Double Declining

Land Improvements            15 Years               150% Double Declining

Real Property                       27.5 or 39 Years    Straight-Line

Cost segregation identifies all building components that can legitimately be classified as tangible personal property or land improvements. Thus, these items are depreciated faster than over 27.5- or 39-years. This reclassification often translates to tax benefits in the first tax year after the study. Also, the tax/cash benefits over the life of the property ownership can total in the hundreds of thousands of dollars. 

For example following a study, a taxpayer that owns a manufacturing facility can legitimately classify the cost of certain equipment foundations, exhaust and ventilation systems, security systems and electrical distribution as tangible personal property. Also, certain site improvements like landscaping, underground utilities and site lighting qualify as land improvements. Depreciation on these items can be accelerated for tax and cash flow benefits.