Elements of a Quality Cost Segregation Report

[Julio Gonzalez]

You’ve decided to get a cost segregation study on your real estate property, but you aren’t sure how to determine which company to choose. It is crucial that you select a company that provides a “quality” cost segregation study as determined by the IRS. In a previous article, we covered the elements of a quality cost segregation study. Here we are going to talk about the elements of a quality cost segregation report.

1. Executive Summary
   1. The summary should identify the preparer, the taxpayer, the date of the study, the property, the units of the property classified as building, land, personal property or land improvements.
2. Narrative Report
   1. This should include a more detailed description of the property including the legal description and location, physical description and the property’s use for which it is intended.
   2. It should include the sources and types of data utilized in the study such as purchase agreement, contracts, cost records, etc. and how that data was utilized in the study.
   3. Rulings, regulations and court cases should be utilized to support the rationale for classifying specific assets as 1245 property.
3. Schedule of Assets
   1. This is a listing of all of the assets that are included in the study. It should tie to the taxpayer’s depreciation schedule. The listing should show which assets were reclassified and show the depreciation for both before and after reclassification.
4. Schedule of Direct and Indirect Costs
   1. 1245 property that has indirect costs allocated to it should be explained. If there are any costs subject to IRC 263A, they need to be addressed here.
5. Schedule of Property Units and Costs
   1. This is a listing that splits the assets into their applicable unit - 1250 property, 1245 property or land - and the costs of each unit. This schedule is utilized for computing depreciation.
6. Engineering Procedures
   1. This section should discuss the engineering methodology and procedures used to determine the cost of each unit. It should specify whether actual cost records or estimates were used. Any interviews or inspections should be documented.
7. Statement of Assumptions and Limiting Conditions
   1. This section gives a generalized understanding of the study and conditions that are applicable to the report. The contents of the section can indicate the quality of the cost segregation study.
8. Certification
   1. The person who created the analysis, opinions and conclusions of the cost segregation report should sign the report and may include their resume or state credentials.
9. Exhibits
   1. This may include photographs or videos of the assets as well as the accounting records that were utilized to derive the costs which should tie to the schedule of assets utilized in the study.

If you’re going to get a cost segregation study, you want to ensure that the results of the study will be upheld in the event of an audit. The quality of the study and report determines the depth and scope of an audit examination. If deemed “quality”, it helps expedite the audit process and ultimately reduces the audit burden on not only the practitioners and examiners, but also on you, the taxpayer.