The Benefits of Engineering Based Cost Segregation

Engineering based cost segregation studies permit commercial real estate owners to reclassify real property for depreciation purposes and reclassify it as more rapidly depreciating personal property. This reclassification results in significant cash flow benefits in both present and future years through considerably shorter depreciable tax life and accelerated depreciation methods.

“Cost Segregation Studies are a lucrative tax strategy that should be considered in almost every real estate purchase.” -US Treasury Department

History of the Program

Cost Segregation has evolved from similar processes used in the 1970s and 1980s to complete investment tax credit studies. Investment Tax Credit (ITC) – When this credit was repealed in 1986, most assumed cost segregation studies provided no further benefit under the new tax law. However, in 1997 a landmark tax court case, Hospital Corporation of America succeed in defending the application of engineering-based cost segregation as a viable method to differentiate real and personal property under existing law.

In 2004 the IRS released the Audit & Technique Guideline, making clear the expected process of performing a successful Cost Segregation Study. This opened the doors for many small and midsize companies to begin taking advantage of what was previously only pursued by larger companies.

 

Who Qualifies for Cost Segregation?
  • Any commercial property owner who has done the following since 1987:
  • Purchased a commercial building or facility
  • Constructed a new commercial building
  • Renovated, remodeled, restored or expanded an existing facility
  • Paid for facility leasehold improvements
What are the Benefits of a Cost Segregation Study?

An average Cost Segregation Study offers approximately $150,000 in additional depreciation per $1 million dollars in purchase or construction cost over the normal 39 year straight line method.

 

Our Methodology

Our team of highly qualified professionals adhere to the IRS recognized Detailed Engineering Approach to perform all Cost Segregation Studies. This methodology maximizes benefits and assures that IRS guidelines are followed.

Average reclassification percentage recaptured with an Engineering-Based Cost Segregation Study.
  • Apartment Building (20-40%)
  • Assisted Living Facility (22-45%)
  • Auto-Car Dealership (29-35%)
  • Bank (30-45%)
  • Conference Center (25-35%)
  • Fitness Center (22-45%)
  • Golf Course (28-60%)
  • Grocery Store (20-45%)
  • Hospital (28-40%)
  • Hotels (20-40%)
  • Leasehold Improvements (20-80%)
  • Manufacturing (20-40%)
  • Medical Office/Clinic (22-35%)
  • Office Building (20-30%)
  • Research Facility (22-45%)
  • Resort (25-45%)
  • Restaurant (20-80%)
  • Retail Strip Mall (18-40%)
  • Theme Park (16-22%)
  • Warehouse (20-30%)
  • Winery (18-45%)

Are Medical Offices a Good Candidate for Specialized Tax Incentives?

Medical facilities are one of the best industry qualifiers for both cost segregation and property tax mitigation.

Medical facilities may include:

  • General Practitioners
  • Specialist
  • Dental
  • Optical
  • Veterinarian
  • Privately Owned Pharmacies
  • And many more

Cost Segregation and Depreciation Recapture?

Depreciation recapture is an often misunderstood aspect of tax planning and comes into effect only during the sale of a property.  

Recapture is limited to the lesser of the gain or the depreciation taken. Meaning, first you have to sell the property and have a gain on the sale to even be concerned.

To have a loss, one would have to sell the property for less than its net tax value. For practical purposes, the depreciation taken is the main limiting factor because the IRS calculates gain as the selling price less the net tax value (cost less depreciation taken). The recapture rules dictate how the gain is taxed, with § 1245 governing personal property and § 1250 governing real property. Section 1245 dictates that the accelerated depreciation taken on personal and real property be taxed at ordinary income tax rates. Section 1250 requires that depreciation taken on real property be taxed at a 25% capital gains rate. Any gain in excess of the total depreciation is taxed at the normal capital gains rate, but this does not wholly dictate whether recapture eliminates a need to do a cost segregation study.

What is Depreciation?

Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.

Most types of tangible property (except, land), such as buildings, machinery, vehicles, furniture, and equipment are depreciable. Likewise, certain intangible property, such as patents, copyrights, and computer software is depreciable.

In order for a taxpayer to be allowed a depreciation deduction for a property, the property must meet all the requirements.

Contact us so we can schedule some time to sit down and see if you can take advantage of a cost segregation study.