Example: Cost Segregation Study for Car Wash Facility

[Julio Gonzalez]

If a Cost Segregation Study had not been performed on this $4.4M car wash facility located in Marble Falls, Texas, it would have had first year depreciation of approximately $293,200. Thanks to the Cost Segregation Study, the property investors accelerated the depreciation that the first year depreciation was approximately $1,629,844.

Through the cost segregation study, they were able to reclassify approximately $2M to a 5 year useful life, $2.35M to a 15 year useful life.

The use of the accelerated depreciation strategy helps real estate investors to reduce the tax liability immediately which therefore increases their bottom line due to the offsetting of income. An additional benefit of a detailed engineering-based Cost Segregation Study is that it can increase potential insurance premium savings as well as provide support for the property tax appeals process. Additionally, it can help maximize renovations and improvements.

A Cost Segregation study is an IRS approved federal income tax tool that increases near term cash flow by utilizing shorter recovery periods for depreciation to accelerate return on investment. For newly constructed, purchased or renovated properties and also retroactive generally over the last 10 years, building components are properly classified into individual units of property and accurate recovery periods for computing depreciation deductions. The study identifies with forensic engineering detail the immediate Bonus Depreciation 5, 7 and 15-year personal property class lives qualifying portions of a building that are normally buried in 27.5 year residential or 39 year commercial categories.

As a reminder, bonus depreciation will start to phase out in 2023. It’s 100% bonus depreciation in 2022, 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and completely phased out in 2027. If you are looking to purchase a property soon and utilize bonus depreciation, it’s important to have the property in service before 12/31/22 to take advantage of 100% bonus depreciation.

[Allan Branch]

Do you have a copy of this study?

[Julio Gonzalez]

@Allan Branch Unfortunately due to client confidentiality, we aren't able to send the full details of the study, but I'd be more than happy to help pull together a cost/benefit analysis for your property to see if it'd benefit from a cost segregation study.

[John McKee]

if you have a property in service before 12/31/22 can you always take advantage of 100 percent depreciation or does that expire as well?

[Julio Gonzalez]

@John McKee You're correct. The bonus depreciation percentage is based on the date the property was placed into service. So as long as it was placed into service by 12/31/22, you can claim 100% bonus depreciation. While it's simplest to do the study in the year the property was placed into service, a look-back study can be performed and a Form 3115 can be filed with your tax return.

[Neera Melwani]

Hi there. This is great information. Is there every any issue with having the form 3115 approved? Does the change need to be approved prior to filing taxes?

Also, in order to take the bonus depreciation, do I need to amend prior year return, or can I take the adjustment in the current year?

[Julio Gonzalez]

@Neera Melwani you can file Form 3115 with your taxes. If you do this, you don't need to amend your prior year return.