COST SEGREGATION STUDIES

ABOUT COST SEGREGATION

A Cost Segregation study allows a taxpayer who owns real estate to reclassify certain assets as Section 1245 property with shorter useful lives for depreciation purposes, rather than the useful life for Section 1250 property. A building, termed "§ 1250 property", is generally non-residential real property (39-year) or residential rental property (27.5-year) eligible for straight-line depreciation. 

Equipment, furniture and fixtures, termed "§ 1245 property", are tangible personal property which has a shorter recovery period (e.g., 5 or 7 years) and is also eligible for accelerated depreciation (e.g. bonus depreciation and § 179 deduction). Faster depreciation write-off (and tax benefit) can be obtained by properly allocating property costs to §1245 property. 

Qualifying § 1245 property is variable depending on the particular facts and circumstances for which the project was designed. As a result, property allocations and reallocations are typically based on criteria established under the Investment Tax Credit (ITC) laws under § 48. 

A formal cost segregation study requires the use of a cost segregation professional with a cost estimating or engineering experience. Extensive knowledge is required to analyze and apply the applicable tax laws to the building components.

Our cost segregations are based on the IRS Cost Segregation Audit Techniques Guide; the very information developed to assist IRS Service Examiners in their review and examination of cost segregation studies. There must be appropriate rationale used to segregate property into its various components, and the methods used to allocate the total project costs among these components.

POTENTIAL BENEFITS:

Maximized tax deferrals through accelerated depreciation deductions

Increase cash flow and preserve capital

Easier write downs when assets are disposed of

An audit trail with back-up supporting the proper classification of assets