Cost Segregation Studies are a lucrative tax strategy that should be considered in almost every real estate purchase”.
– US Treasury Department
Cost Segregation is a tax strategy approved by the IRS since the enactment of TRA 86, to reclassify specific personal property assets to shorten the depreciation time for taxation purposes, which reduces current income tax obligations.
Personal property assets include a building’s non-structural elements, exterior land improvements and indirect construction costs. The primary goal of a cost segregation study is to identify all construction-related costs that can be depreciated over a shorter tax life (typically 5, 7 and 15 years) than the building (39 years for non-residential real property).Personal property assets found in a cost segregation study generally include items that are affixed to the building but do not relate to the overall operation and maintenance of the building.
Due to improved treatment, portions of the electrical, plumbing, mechanical systems, and site improvements of a building along with hundreds of other components can be allocated into shorter lives translating into immediate cash flow.
Cost Segregation is not limited to newly constructed or purchased property. Any taxpayer who placed MACRS residential or nonresidential real property in service after 1986 (New, Built or renovated), without allocating costs to personal property, can have a cost segregation study performed. Additionally, properties placed in service prior to the current tax year can receive permission to change its accounting method pursuant to Rev. Proc. 2002-9, Appendix, Section 2.01. ~~Under this revenue procedure, a taxpayer is allowed to reclassify building elements as personal property and claim a deduction for the depreciation that should have been claimed on those elements creating a negative (taxpayer favorable) IRC §481(a) adjustment ~~effective for tax years ending on or after December 31, 2001 (Rev. Proc. 2002-19, modifying Rev. Proc. 2002-9)~~
Real property eligible for cost segregation includes buildings that have been purchased, constructed, expanded or remodeled since 1987. A study is typically cost-effective for buildings purchased or remodeled at a cost greater than $200,000. A cost segregation study is most efficient for new buildings recently constructed, but it can also uncover retroactive tax deductions for older buildings which can generate significant short benefits due to “catch-up” depreciation.
Per the IRS, most practitioners do not have the necessary expertise to conduct a cost segregation study which is acceptable to the IRS. The standards for such studies are high (see LTR 199921045). Thus, it is generally advisable to work with an outside consultant who specializes in this area. KPM Group Tax & Business Services, LLC has 20 years of expertise in completing the engineered tax analysis required by the Internal Revenue Service.
Cost segregation studies can identify hundreds or even thousands of separately depreciable components in everything from residential rental properties to complex structures such as hospitals, restaurants, office buildings and factories. In addition to identifying personal property elements, the study must allocate the appropriate costs to these items. Such costs include direct material and labor costs, as well as indirect costs such as architect and engineering fees and impact and permit fees. In the case of an existing building where records are not readily available, valuation experts may rely on standardized cost estimation manuals.
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* if Significant renovations have occurred, please include the value and a brief description of the renovation including the date of completion