Cost Segregation Study | Frequently Asked Questions

Frequently Asked Questions About Cost Segregation

What Is Cost Segregation?

Cost segregation is a strategic tax planning method that accelerates tax depreciation deductions and defers federal and state income taxes. Real property is often depreciated over 27.5 years or 39 years, but certain building components such as electrical installations, plumbing, and  mechanical systems and finishes qualify for 5, 7 or 15-year depreciation lives. Studies can also separate out personal property assets, which cannot be depreciated for tax reporting purposes.

Who Qualifies for Cost Segregation?

Companies that construct, renovate, or acquire commercial or residential real estate see the most benefit from cost segregation, but any company that makes building upgrades that exceed $500,000 may also be good candidates for cost segregation. The ideal project for cost segregation involves newly constructed, acquired, or renovated commercial and residential properties with a depreciable basis of more than $1 million.

When Should I Get a Cost Segregation Study?

Ideally, a cost segregation study is performed in the year of the acquisition, construction, or renovation of a property. Businesses can also have look-back studies where cost segregation is performed on buildings built, acquired, or renovated within the past 10 years. During a look-back study, tax professionals identify previously missed deduction opportunities.

What Is the Cost Segregation Process?

Certified tax professionals and qualified engineers inspect the property, determine the value of each component, and assess the proper tax classifications. Tax professionals then work with business owners to determine how and when to use the accelerated depreciation deductions to receive the maximum tax benefit.

What Is the Benefit of Cost Segregation?

The average net present value savings yields a return on investment of $15 of tax savings per dollar spent in fees.

How Can I Find Out If a Cost Segregation Study Is Right for Me?

Even with the pandemic, economic ups and downs, and rising interest rates, commercial real estate remains an appealing investment.

While the benefits of cost segregation studies are likely to remain appealing in any case, there is potentially an added wrinkle to consider for studies that are completed during 2022 and beyond.

While most may know that accelerated depreciation is available on purchases of equipment in the form of bonus depreciation, they may not realize that there is also a tool available that can allow them to accelerate items currently grouped with building and improvements. This tool is known as a cost segregation study. This option has been available for many years, but the recent passage of the CARES Act has significantly increased its benefit.


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