What is Cost Segregation?
Cost Segregation is a strategic tax savings tool that allows companies and individuals who have constructed, purchased, expanded, or remodeled real estate to increase their cash flow by accelerating depreciation deductions and deferring their federal and state income taxes.
The goal of a Cost Segregation study is to identify, segregate, and reclassify project-related costs that are currently classified as real property to shorter depreciable tax lives for federal and state income tax purposes. Recent IRS rulings and procedures have allowed taxpayers to change accounting methods to take advantage of these previously understated depreciation expenses – back to 1987. This is done without amending tax returns.
Cost Segregation started in the 1960’s and has been called component depreciation studies, investment tax credit studies and various other names. No matter what name you use — Cost Segregation can save you tax dollars and increase your cash flow. There are over 300 court cases and I.R.S. rulings supporting the benefits of Cost Segregation. The following is an example.
Hospital Corporation of America v Comm. 109 TC 21 (1997) ruled that certain assets associated with a specific piece of equipment not linked to the normal operation and maintenance of the building qualify for five-year depreciable tax lives instead of 39-year depreciable tax lives.
Essentially, the tax courts and IRS have agreed that the taxpayer can use a Cost Segregation study to segregate the cost of
What Types of Buildings Qualify?
The photographs above show several types of buildings that would benefit from a cost segregation study. It also represents typical percentages of project-related costs that can be reclassified from 27.5/39-year (real property) to 15-year (land improvements) or to 5-or 7-year (personal property) for each building type. Additional examples are automobile/truck dealerships, convenience stores, car washes, gas stations, shopping malls/strip centers, fitness centers/sporting facilities, golf courses/ranges, resorts, casinos, and industrial buildings. These percentages are based on 31 years of cost segregation experience and thousands of studies.
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