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What is Cost Segregation?
Cost Segregation is a process to identify personal property assets that often get buried or lumped together within the real property asset. Our consultants reclassify those asset costs to the shortest possible depreciable life to enable the real estate owner to maximize their tax depreciation deduction, thereby reducing current income tax obligations. If you are undertaking construction, renovation or purchase of a building, you may be eligible for substantial state and federal tax savings.
Certain assets related to the project may qualify for accelerated depreciation, meaning you can take larger tax deductions over a shorter period. The benefits of larger tax deductions include increased cash flow and lower cost of capital in the first few years following a project or purchase.
A Cost Segregation Study, conducted by the qualified professionals at TaxBreak, can help you identify opportunities to claim accelerated depreciation.
How does this work ?
A Cost Segregation Study is a strategic analysis which allows companies that have constructed, bought, expanded or remodeled real estate to increase their cash flows by accelerating depreciation-related tax deductions. To do so, the study identifies, segregates and reclassifies property costs currently being depreciated over the typical 39-year depreciable period to shorter depreciable periods of 15, 10, 7, even 5 years.
This means you can enjoy tax deductions right now that you’d otherwise have to wait years to receive. So, you’ll not only increase the net value of current tax savings, but also boost your cash flow.
A Cost Segregation Study may be a particularly wise move if you’re:
- Building a new facility
- Acquiring an existing building
- Improving, renovating or expanding an existing building, or
- Conducting leasehold improvements on your current facility
The analysis works most efficiently for new buildings under construction, but it can uncover retroactive deductions for older buildings as well.
Who’s involved?
A Cost Segregation Study is not a mere depreciation analysis. It calls for far more than just classifying line items from construction invoices. The process requires a team of experts well-versed in accounting regulations and tax laws, as well as engineering and construction principles.
Together, they’ll analyze detailed working drawings, mechanical and electrical plans and blueprints to segregate the structural, electrical and mechanical components from those linked to personal property. The study will also allocate “soft costs,” such as architectural and engineering fees, to all components.
How Much Can You Save?
Property owners often view building components as parts of the entire structure and depreciate everything over 39 years, but many expenditures fall into categories with much shorter depreciable lives.
For instance, you may be able to define the parking lot as 15-year property and landscaping and shrubbery for the outside of the building as 10-year property. You could also classify lighting and plumbing fixtures, as well as carpeting used in a new showroom, as 7-year property. Items such as electrical and ventilation systems, phone lines, computers and furniture can be classified as 5-year property.
Also, the current Section 179 expensing rules still apply for depreciation if you operate your business as a limited liability company and hold your building in that entity. And, perhaps best of all, the fee for the Cost Segregation Study that brings about these savings is generally only 10% to 20% of the resulting cash flow increase.
Who Benefits
- Apartment Complexes
- Automobile Dealerships
- Distribution Centers
- Fast Food Restaurants
- Food Processing Facilities
- Hotels/Motels
- Manufacturing Plants
- Medical Centers
- Nursing Homes
- Office Buildings
- Retail Chains
- Shopping Malls
- Sports Stadiums
- Supermarkets
Investment Eligibility
- All post-1986 real estate construction, building, acquisitions or improvements
- New buildings under construction
- Existing property constructed anytime, but placed in service after 1986
- Purchase of existing property
- Existing buildings undergoing renovation or expansion
- Office leaseholds improvements and fit-outs
Our dedicated TaxBreak consultants have completed over 1,000 Cost Segregation Studies for clients throughout the United States.
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