Discover how Cost Segregation Studies work
Cost segregation is a strategic tax planning tool that accelerates depreciation deductions by identifying and reclassifying certain components of your property to shorten their depreciation time.
This detailed analysis, conducted by engineering, construction, and tax law specialists, allows for substantial tax savings and improved cash flow. Commonly beneficial for commercial real estate owners including those with office buildings, retail spaces, manufacturing facilities, apartment complexes, and hotels.
Required documents
To undertake a cost segregation study effectively, you will need:
- An engagement contract with a qualified cost segregation specialist.
- Construction documents and financial records.
- Detailed property analysis reports including site visits.
- A comprehensive cost segregation report from the specialist detailing asset categorization.
Benefits of Cost Segregation
- Increased Cash Flow: By accelerating depreciation deductions, businesses can significantly reduce their taxable income, enhancing their available cash flow.
- Tax Deferral: Accelerated deductions mean deferring tax payments to later years, allowing more immediate reinvestment in your operations.
- Improved ROI: The savings from increased cash flow and tax deferrals directly improve the return on investment for property owners.
Examples of Reclassified Assets in Cost Segregation
Common assets identified and reclassified through cost segregation include:
- Carpeting and flooring: Treated as personal property for accelerated depreciation.
- Electrical and plumbing systems: Specific to equipment and therefore eligible for faster depreciation.
- Landscaping and outdoor lighting: Often reclassified to property improvements with shorter depreciable lives.
- Signage and specialty equipment: Recognized separately for quicker depreciation benefits.
Conducting a Cost Segregation Study
- Engage a Professional: Hire a specialist with the necessary expertise.
- Property Analysis: Conduct thorough property reviews including site visits.
- Asset Identification: Categorize assets based on the potential for reclassification.
- Report Preparation: Develop a comprehensive report documenting all findings.
- Tax Filing: Adjust depreciation schedules based on the study for tax filings.
Important considerations
Cost segregation studies demand precision and expertise. It is crucial to collaborate with professionals who are deeply familiar with your property type and current tax laws. Ensure that all IRS guidelines are followed meticulously to maximize benefits and avoid potential audits.
Consulting with a tax professional is strongly recommended to navigate the complexities involved.
For more information, please refer to the IRS Cost Segregation Audit Technique Guide.