Cost Segregation FAQ

[Julio Gonzalez]

Cost segregation studies is an area in which many people have a lot of questions about. I thought it might be helpful to address some of the most frequently asked questions that I receive.

WHAT IS A COST SEGREGATION STUDY?

A cost segregation study is a strategic tax planning tool that separates the assets that have a shorter useful life and can be depreciated over 5, 7 and 15 years from the residential rental property or nonresidential real property that are depreciated over 27.5 and 39 years, respectively. By accelerating your depreciation schedules, you reduce your taxable income which in turn increases your operating cash flow. This also allows for property owners to more easily write-off assets that get damaged/destroyed as the value of these assets is determined as part of the study. You will receive a report as a result of the cost segregation study that supports the breakout between asset classes and new depreciation schedule in the event that you are audited by the IRS.

WHAT IS THE COST OF A COST SEGREGATION STUDY?

If you’ve considered a cost seg study in the past but they were too expensive, times have changed and the fees have gone down significantly. The cost of a cost segregation study varies but typically ranges between $10,000-$15,000. The quality of the reports you receive also varies. Many cost segregation study professionals will offer you a free quote on the cost of the cost seg study specific to your property as well as the potential tax savings.

HOW LONG DOES A COST SEGREGATION STUDY TAKE?

Each property is different, however a cost segregation study typically takes about 4-6 weeks to complete in order to ensure a quality cost segregation study.

HOW MUCH MONEY CAN A COST SEGREGATION STUDY SAVE ME?

Based upon the cost seg studies of my clients, a building will typically yield 25-30% of the total cost that can be segregated into personal property and land improvements.

HOW DO I CHOOSE A COST SEGREGATION STUDY PROFESSIONAL?

There are many cost segregation specialists to choose from, so it’s important to perform due diligence. Here are some important questions to ask when choosing a specialist.

• Does the firm have engineering licenses with the state authorities?
• How long has the firm been in business?
• What is their reputation with the IRS?
• Will they defend my report in an IRS audit?
• Do they include energy tax benefits within their study?
• Do they have insurance and property tax reduction reports in their study?
• Do they have the proper insurance and licenses?

WHEN IS A COST SEGREGATION STUDY NOT A GOOD OPTION?

If your property is losing money, it is not recommended to perform a cost seg study. It is recommended to own the property for at least two years in order to take full advantage of the cost segregation study. Not all commercial properties qualify for a study. Price valuation is an important factor on whether a study is necessary for the owner or not. The tax savings should be significant in comparison to the cost of the study.

CAN A COST SEGREGATION STUDY BE PERFORMED ON PROPERTY THAT I PURCHASED IN THE PAST?

Yes. Property owners can obtain a cost segregation look-back study on their current property to recalculate the depreciation for previous tax years based on their reclassified assets.

CAN I STILL DO A COST SEGREGATION STUDY IF MY CONDOMINIUM COMPLEX IS A SHORT-TERM VACATION RENTAL?

Yes. It’s important to note that short term rentals depreciate differently than long term rentals. Although a condominium is considered residential property, it's typically depreciated over 27.5 years. However, in the case of a short term rental, it would depreciate over 39 years depending on if 20% or more of the units in the entire building are considered transient (rented for 30 days or less).

What other questions do you have about cost segregation?

[Julio Gonzalez]

@Bruce Woodruff While it may seem like a simple concept, it's actually a very complex process that requires significant documentation as well as specific methodologies. If the proper reports and documentation are not completed, you run the risk of failing an IRS audit and the cost segregation not being honored. Here's a link to the IRS website noting specific items that are included in the cost segregation study report.