A cost segregation study is a tax savings analysis of real estate holdings designed to:
In general, buildings can be depreciated over either a 27.5-year or a 39-year period, but certain categories of fixed assets within a building can be depreciated more quickly, over five, seven or 15 years, resulting in significant tax savings. Enlisting the services of a CPA and other qualified advisors to identify and reclassify these assets can accelerate part of the building’s tax depreciation, resulting in a reduced tax liability.
Cost segregation studies are typically performed by accounting and engineering consultants who perform a thorough analysis of real estate, including intangibles and leasehold improvements. These studies are designed to accelerate the tax deductions for depreciation based on reclassifying eligible fixed assets to shorter recovery periods. During this project your advisors identify those assets, assess their value and determine the resulting tax deductions for depreciation. Your consultants will follow relevant FASB guidelines and provide thorough documentation for use in the event of an IRS audit.
It is best to incorporate cost segregation as early as possible in the construction stage or at the time a building is purchased in order to maximize the tax benefit you receive. You can, however, also recapture understated or “missed” depreciation for past construction, purchases, expansions, renovations and leasehold renovations via cost segregation studies. In this case, no amended tax returns are required: so-called “catch-up” depreciation is taken in one year by filing Form 3115 (Change in Accounting Method).
Services such as cost segregation studies can be a useful way to increase cash flow and reduce tax liability. Click here to contact us and discover if cost segregation is the right choice for you.
