However, it may be possible for a building owner to recoup some costs much faster by following a cost segregation study. This could be a "selling point" for construction firms as well as a major tax benefit for any company that owns its own building.

In basic terms, a cost segregation study identifies shorter cost recovery periods for different types of assets. The analysis begins with the Modified Accelerated Cost Recovery System (MACRS) used to depreciate building assets. For instance, a study conducted by industry experts may reclassify the cost recovery periods for certain assets to be depreciated over five, seven or 12 years. This approach combines various aspects of engineering, accounting and tax principles.

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, cost data details are analyzed, and direct labor, materials and indirect costs are apportioned. These steps culminate in the preparation of an itemized list of property "units" qualifying for shorter-life classifications. The study is documented and a complete "audit trail" supports cost allocations derived from contract documents and other source data.

The cost segregation study utilizes direct costs like labor and materials required to construct the building as well as indirect costs such as design fees, contractor overhead, permit fees, interest, etc. Indirect costs may be allocated to direct costs on a pro rata basis. Other data (including the contractor's application for payments, change orders and other related costs and disbursements) are factored in.

The property in question must be inspected thoroughly to develop a complete understanding of the function and nature of all the building components. In addition, the analysts conducting the study must determine the accuracy of all documentation. This is a critical element involved in the reclassification of assets.

What Kind of Savings Can You Expect?
A typical cost segregation study may result in a reclassification of 25% to 40% of the building assets. This could represent a significant tax savings for building owners through faster depreciation methods.

For example, a newly constructed, $5 million building with 25% of cost allocated to shorter asset lives could result in tax savings ranging from $40,000 - 50,000 in Year 1 and $70,000 - 80,0000 in Year 2.

For existing properties, under a recent IRS ruling, the accumulated tax savings from previous years may be accelerated into the year the study is performed.

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

This methodology may be used for new buildings or existing structures that have been acquired or are being improved. For new property, further construction information may provide detailed breakdowns of costs. IRS regulations issued in 2004 approve the use of cost segregation study after a building has been acquired.

Bonus Depreciation Deduction
The Economic Stimulus Act also allows a business to deduct 50% of the cost of qualified business property placed in service in 2008. This tax break generally is limited to new property.

Insurance Benefits
Cost segregation reports may serve as detailed replacement cost appraisals as well by eliminating the guesswork that goes into insuring a property. It also allows you to reclassify building rates to business personal property rates, which may substantially reduce annual casualty premiums.

Reduction in State Property Taxes
A successful tax appeal is founded upon the application of valuation principles. The detailed cost analysis offered by cost segregation methodology enhances both the reliability and accuracy of the valuation process. Property taxes are generally considered one of the highest fixed operating costs associated with the ownership of commercial real estate. A structured cost segregation study may help to reduce your overall tax liability and give you the ammunition to appeal state property taxes.

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.

Kevin E. Reynolds, CPA is a Partner in our Tax Services Department and is based in our Boca Raton office. With over 15 years of experience in public accounting, his goal is to help clients minimize their total tax liability and make financially sound, tax-savvy business decisions. Focusing on the health care, real estate and retirement plan industries, Kevin is able to provide expertise and guidance in addressing such complex issues as cost segregation, like-kind exchanges, mergers and acquisitions, and corporate structuring. Contact him directly via email at kreynolds@daszkalbolton.com or by phone at 561.953.1443.