What kind of property will qualify for a Cost Segregation Study?

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What is Cost Segregation?

 

When can I complete a Cost Segregation Study?

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What are the benefits of a Cost Segregation Study?

Simply, Cost Segregation is the process of separating personal property that has been grouped or included in a building or other structure from real property for tax purposes.

A Cost Segregation Study utilizes tax rules to assign shorter asset lives to personal property, increasing the annual depreciation and thereby lowering the company’s net income and income taxes. Depending upon the size and type of business being either built, expanded or purchased, a company can significantly reduce their tax burden in the first five years after placing the building in service. Paying fewer taxes today means more cash flow for investment, capital equipment, additional employees or working capital.

If your company is building or expanding a building, parking structure or other real estate, a Cost Segregation Study can be completed as the building is being finished or after it is completed. However, getting a cost segregation professional involved during the development phase of the structure can help to increase the benefit of the study. How? While there are several tests that an asset much pass to be classified as either real or personal property, installing assets that are movable, detachable or removable can result in classifying the asset as personal property (with a much shorter tax life) than real property.

You can also perform a Cost Segregation Study on a building recently purchased in order to maximize your depreciation in the first few years after purchase. By completing the Cost Segregation Study early, the new building owner can enjoy lower taxes and more cash flow immediately.

If you have owned your building for a few years, you can still generate immediate value through a one-time “catch up” depreciation deduction by completing a Cost Segregation Study. The adjustment can be taken immediately and does not have to be spread out over several years.

Typically, buildings bought, constructed or expanded with a cost basis of greater than $500,000 will benefit from the increased depreciation. Building types include:

The obvious benefit is reduced taxes through higher depreciation in the first five to seven years after a building is placed in service.

             Documentation-       How many times have you looked back at your records at assets purchased three, four or five years ago, wondering where the supporting records might have been placed? A Cost Segregation Study documents each of your assets, its purchase price, useful life and purchase date. Proper documentation can provide significant value during an IRS audit in the future.

             Reduced Property Taxes-             When a Cost Segregation Study is completed, the cost assigned to your real property will decrease to a percentage of the total cost. A portion of your original purchase price will be allocated to personal property. Where real property tax rates are higher than personal property tax rates, a Cost Segregation Study can help reduce the overall cost of property taxes.

             Reduced Sales and Use Taxes-                Some states provide exemptions for certain kinds of buildings or capital assets used in certain industries. A Cost Segregation Study can identify these assets and exempt the company from paying sales or use tax due to the state exemptions and use in their business.

             Reduced Insurance Premiums-                When your property insurance carrier can better understand the actual replacement value of your property, they can better analyze the potential cost in the event of a fire or other casualty loss. A Cost Segregation Study can provide your insurance agent with the necessary information to better understand the potential costs and as a result, sharpen their pencil when calculating your insurance premiums.

 

Contact the engineering professionals at Acena Consulting for a free estimate of the initial five year cash flow benefit of completing a Cost Segregation Study on your building, retail chain, hospital, arena or apartment complex at costseg@acenaconsulting.com

 

How can I generate these tax savings and increase cash flow?

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