Hey CPAs, Can I do my own cost segregation study?

Question

I am a practicing Texas Licensed Civil Engineer. I work at a consulting firm that does development work, utility work, drainage, paving, construction management, surveying, plating, etc. I estimate project costs on multi million dollar infrastructure jobs and have had to do life cycle component stuff for financial advisors and insurance companies for some of our clients. In my opinion, my education and experience would justify to the IRS that I am perfectly qualified to do cost segregation studies. Can I do my own?

While on the subject, I own 5% of the consulting engineering firm. For this reason, I believe I qualify as a real-estate professional for my properties that I manage.  Does this sound reasonable?

Thanks for the help. My intention is to take an upfront 20% or so bonus depreciation on the $500k commercial building I bought last year. Does this seem in line with what you guys are seeing on your cost segregation studies? I think I could justify more but do not want to stir the IRS beast.

Julio Gonzalez · Answer

@Travis Reed to be honest, with all the new regulations around documentation for cost segregation that has come out, I recommend having a professional do them. 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 on page 24. The IRS is taking a more conservative approach and you want to ensure you have all your ducks in a row + a team behind you to back you up if something comes into question. Most cost segregation firms will provide a free cost/benefit analysis quote to help you determine if the tax benefits from the study will outweigh the costs. But as @Greg Scott mentioned, step 1 would be talking with your CPA to see if you qualify as a real estate professional.

Bonnie Griffin Kaake · Answer

@Travis Reed You would be well advised to take the advice of both @Julio Gonzalez and Chris Picciurro and work with an experienced engineering-based cost segregation company. Your time is better spent on doing what you do best. A quality cost segregation company will cover you if ever audited. If you get audited by doing it yourself, you will spend a lot more money defending yourself than the small cost of getting a professional study done on your $500K investment. I have done studies or hoped to do studies on properties that only had 5% of the purchase price that could be cost segregated and others where 90% could be depreciated. This is not as easy as it might appear, even for someone with your background. The tax considerations are complex and change from year-to-year and quarter-to-quarter.

Jeff Nash · Answer

There is Cost Segregation Audit Technique Guide (Publication 5653) that I think @Greg Scott is referring to, and here is a few noteworthy excerpt:

"The preparation of cost segregation studies requires knowledge of both the construction process and the tax law involving property classifications for depreciation purposes. Unfortunately, there are no prescribed qualifications for cost segregation preparers. However, a preparer’s credentials and level of expertise may have a bearing on the overall accuracy and quality of a study. In general, a study by a construction engineer is more reliable than one conducted by someone with no engineering or construction background. However, the possession of specific construction knowledge is not the only criterion. Experience in cost estimating and allocation, as well as knowledge of the applicable tax law are also important criteria."

So it appears you probably have the requisite technical expertise based on your engineering background, but your level of tax knowledge and it's application would have to be demonstrated.  Perhaps you can just collaborate with a CPA to bridge any knowledge gap and perform the detailed work nevertheless.  Hope this helps.

Chris Picciurro · Answer

I would personally not do your own cost segregation. There are a lot of very economical options for a $500K building that comes with audit protection. The 20% isn't an automatic deduction. Each property is unique.

Bob Solak · Answer

Travis, you are qualified.  My business partner and I are Civil/Environmental P.E.'s and we've done our own cost seg studies.   You need to get your hands on a few example cost segs to use as templates (there's a fair amount of boiler plate language in the report itself) and you'll be able to figure it out from there.

Greg Scott · Answer

I'd talk with a CPA on whether or not you would qualify as a Real Estate Professional. If your W2 isn't considered a "real estate job", it would be nearly impossible to qualify.

It used to be easier to Google, but the IRS once published the 5 or 6 ways to do a cost segregation analysis.  (I can't find it now) They ranged from a full-blown engineering study to an estimation based on experience.  Obviously they ranged from "Most acceptable" to "Least acceptable" but the IRS said any of them might be acceptable; you just have different levels of risk with each one. In any of the ways, the more justification you have for your position, the better.  Picking 20% out of the air would be dangerous. Taking 30% with good logic to support it would be safer, even if it more aggressive from an accounting perspective.

Hey CPAs, Can I do my own cost segregation study?

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