Why put off deductions when you can benefit today?

Cost segregation study: why put off deductions when you can benefit today?

Marc Wieder

Owners of commercial and residential real estate can realize significant tax savings up front if they pay closer attention to what they already know–a real estate acquisition involves much more than the building and the land.

An acquisition also includes the purchase of the existing furniture, fixtures, equipment and land improvements. By commissioning a professional cost segregation study, which allocates the acquisition price into all its parts, investors can realize depreciation tax benefits more quickly.

Cost segregation studies allow you to depreciate the separated assets’ over five, seven or 15 years, depending on their asset class.

Without a cost segregation study, total depreciation savings would take 27.5 or 39 years to be realized (depending upon whether the property was residential or commercial).

Why wait for the money?

Some real estate investors haven’t waited and have had millions returned to them after completing their cost segregation studies. Many property owners, though, are not aware of this relatively new opportunity.

Seven years ago, the Internal Revenue Service gave its approval to asset separation and rapid depreciation (Hospital Corp. of America, et al. v. Commissioner, 109 TC 21, Code Sec. 168). The IRS determined that real property purchasers, after obtaining professional supporting documentation, can speed up the depreciation on certain portions of the building and surrounding properties.

The best properties to benefit from an asset reclassification are ones with vast amount of land improvements, decorative features, appliances, cabinetry, etc. For example, a shopping mall is much more than a structure and the land on which it sits.

The landscaping, decorations both inside and outside such as fountains and sculptures, and fixtures such as lighting and seating, all can be segregated so their asset value can depreciate more quickly.

Other good candidates include: Rental properties; Multifamily apartment complexes; New construction; Major renovations and tenant improvements; Purchases of real estate partnership interests and; Inherited property.

A cost segregation study has another benefit for major renovations or tenant improvements. It allows for maximizing the amount of property eligible for bonus depreciation, which is now 50 percent of the cost.

While the best time for a cost segregation study is the time of purchase, it’s not too late to take advantage of this opportunity as long as the property was purchased or improved after 1987.

Fortunately, the process to benefit from missed years isn’t too complicated. There is no need to amend previous tax returns. After the cost segregation study is completed, the cumulative depreciation savings for the previous years as well as the current one, if applicable, can be taken on the current year’s tax return.

Consider this retroactive example. A cost segregation review was never done on a property purchased 10 years ago. This year, the owner gathers building site plans, engineer reports, appraisals and business tax returns, then hires a cost segregation professional to complete a cost segregation study.

The study will be based on the property and its assets value in 1994–the year of purchase. The depreciation savings will be based on that study’s findings.

The up-front savings and improved cash flow when compared to the minimal expense of a cost segregation study show that it’s worth paying for the study now to reap the financial benefits of depreciation as early as possible. Another bonus is that by separating the assets’ values through a professional study, property owners can write off individual items as they dispose of them. Without a cost segregation evaluation, individual asset write offs would not be possible.

Example of commercial property assets that can be reclassified:

Land improvements–15-year property depreciation

* Site preparation

* Site utilities

* Paving and curbing

* Exterior lighting

* Fencing

* Flagpoles

Furnishing, Fixtures & Equipment-Seven-year

property depreciation

* Carpeting

* Vinyl flooring

* Wallpaper

* Windows

* Dock equipment

* Fire extinguishers

* Cabinets

* Guard rails

* Decorative lighting

Examples of residential rental property assets that can be reclassified:

Land improvements–15-year property depreciation

* Site utilities and drainage

* Parking lot paving

* Sidewalks and curbs

* Exterior lighting

* Underground sprinklers

* Signs and fencing

* Landscaping site improvements

* Swimming pools, tennis courts and play


Furnishing, fixtures and equipment – Seven-year

property depreciation

* Office and clubhouse furniture and fixtures

* Indoor sports courts

* Fire extinguishers

* Emergency lighting

* Alarm systems

* Floor molding

Distributive trades and services–Five-year

property depreciation

* Carpeting

* Appliances

* Smoke detectors

* Counters

* Cabinets

* Window treatments


COPYRIGHT 2004 Hagedorn Publication

COPYRIGHT 2004 Gale Group