Cost Segregation
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What is cost segregation?
A Cost Segregation Study is a tax saving strategy that reduces federal (and state) income taxes by accelerating depreciation methods from real estate investments.
The process involves an engineering study to identify personal property and other shorter-lived assets from the cost of acquired properties or new construction.
Buildings and improvements are normally depreciated over 27.5 or 39 years for federal tax purposes.
A cost segregation analysis can reclassify 20% to 40% of a building’s value to personal property with a 5, 7, or 15-year depreciation life, as well as support depreciable basis verses non-depreciable land basis allocations.
By reducing tax lives, the taxpayer will accelerate depreciation deductions, reduce tax liability, and optimize cash flow.
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We can typically save you over thirty percent what other providers charge due to the efficiencies and shared data involved.
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Benefits to taxpayers
In addition to compliance applications such as purchase price allocation and capitalization policies that follow the IRS Tangible Property Regulations, cost segregation studies are designed to support (in front of the IRS or state taxing authority) maximizing accelerated deductions and/or creating tax losses that can be carried back or forward. Both of these elements can be critical tax planning items for reduced tax liability.
recent tax policy changes
CARES Act: Reinstates use of NOL (5-year carryback, carryforward limitation lifted); Qualified Improvement Property corrected to qualify for bonus depreciation; 163J Interest Limitation (limits increased from 30% to 50%).
Recently released proposed regulations on Sec. 1031 like-kind exchanges (REG-117589-18) defining personal property that qualifies as like-kind.
100% bonus depreciation starts to phase down in 2023.
Situations where cost segregation will apply
When assets are acquired, they are generally required to be capitalized for federal and state tax purposes. Cost segregation studies are commonly applied to assist with capitalization policies including value allocations of acquired basis, unit-of property determinations, and capitalization versus expense decisions. Events that may trigger the need for cost segregation include:
Property acquisitions, including 1031 Exchange
Construction of new property or leaseholds improvements
Renovation or expansion of an existing building
Historical tax basis where cost segregation was not applied in order to support year of correction “catch-up” deductions
NOL carryback and year of sale strategies
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