Cost Segregation Studies and Reports

[Bernard Reisz]

Your input is valuable: How do you want your Cost Seg study prepared?

For context, let's cover some Cost Segregation fundamentals, and explain the interaction between Land Value and Cost Segregation:

Cost Segregation is the process of (a) segregating a "building" into its component parts and (b) allocating the lump-sum acquisition cost to those components. Hence the term, Cost Segregation Study.

Incredibly large tax deductions are created because many of those components are short-life assets, depreciable at a far faster rate than residential or commercial buildings that are depreciated over 27.5 and 39 years, respectively. And, ever since enactment of TCJA, much of that could be immediately depreciated as "Bonus Depreciation." (Bonus Depreciation is now gradually fading away.)

Question: How much of your total acquisition cost is the subject of a Cost Seg study? How much of the acquisition cost is part of the engineering allocation?

Answer: It is the total purchase price minus the portion of the purchase price that is properly allocable to the land, which is not depreciable.

While land allocation is not part of the Cost Seg engineering work, the final Cost Seg Report - that includes specific dollar cost allocations for components and a depreciation schedule - incorporates a land value allocation. A higher allocation to land results in less cost allocable to depreciable assets (i.e., lower tax deduction claimed). A lower land allocation results in more cost allocated to depreciable assets (i.e., higher tax deduction claimed).Of course, the IRS has a thing or two to say about how land allocation is properly determined. This is something that some of the great Real Estate CPAs of BP have posted about, in-depth. 

CPAs, EAs, Accountants, Real Estate Investors, Equity Raisers, Tax Professionals (or anybody that's got an opinion):

What default land allocation assumption would you like to see incorporated into Cost Segregation Reports, yours or your clients?