What is a cost segregation study? Income tax savings are created by utilizing shorter asset lives (qualifying 5, 7, or 15 year write-off periods) that are normally embedded in a building’s construction or acquisition costs (generally depreciated over 39 years using the slow straight-line method). IRS regulations provide for the use of shorter lives and accelerated depreciation for certain improvements made to commercial buildings. This allows for substantial cost savings for many types of property owners.  Through a comprehensive engineering-based approach, your property is reclassified into shorter-life classes based on applicable tax guidelines.

Engineering-Based Approach
Cost segregation studies are performed by employing engineering and cost-estimating procedures recognized by the IRS. During a cost segregation study, your property is physically inspected, architectural/engineering drawings and specifications are examined for potential asset reclassification, cost data details are analyzed, an itemized list of property units qualifying for shorter-life classification is prepared, direct labor, materials and indirect costs are apportioned, and total costs are reconciled based on the engineering analysis to capitalized project costs.  The study is documented and a complete “audit trail” supports cost allocations derived from contract documents and other source data.

What Qualifies for Cost Segregation?
Commercial real estate owners who plan to hold property for a few years can greatly benefit from a cost segregation study.  Buried tax savings can be found in:

• New buildings presently under construction
• Existing buildings undergoing renovations, remodeling, restoration, or expansion
• Purchases of existing properties
• Office/facility leasehold improvements and build outs
• Post-1986 real estate construction, building acquisitions, or improvements where no cost segregation study was performed for the year of purchase

Benefits of a Cost Segregation Study

Reclassifying a building or leasehold improvement from the traditional 39-year depreciation period to a five-, seven- and fifteen-year classification results in a significant financial benefit.

For example, below is a sample tax saving analysis of a $5 million building purchased in 2006 with depreciation calculated both with and without a cost segregation study.  As a result of the cost segregation study with 25% of the cost allocated to shorter asset lives, the taxpayer was able to write off an additional $131,000 in Year 1 and an additional $218,000 in Year 2.  Assuming the taxpayer is in the highest tax bracket, total dollar for dollar tax savings could be as much as $45,850 in 2006 and $76,300 in 2007.

2006:

With Cost Segregation                 $190,000
Without Cost Segregation              $59,000
Additional Deduction                    $131,000

2007:

With Cost Segregation                $346,000
Without Cost Segregation          $128,000
Additional Deduction                   $218,000

Is a Cost Segregation Study Right For You?
Cost segregation is a highly specialized process typically performed by firms specializing in commercial real estate services.  IRS regulations, rulings, and other interpretations are complex and voluminous.  The challenge is to apply this complex knowledge to your circumstances.   

Daszkal Bolton LLP tax professionals are experienced in this area and have saved clients millions of dollars.  Cost segregation analysis reports have also withstood IRS scrutiny.  Our firm provides the highest level of quality to our clients and the highest rate of return on your investment.  The higher the cost of the property, the more benefit the analysis provides.  If you would like to enhance the cash flow of your real estate assets, ask a Daszkal Bolton tax advisor for more information about a cost segregation study.