The Digital Transformation of Cost Segregation

[Julio Gonzalez]

Cost segregation has been a major player in tax strategies for real estate owners by reclassifying assets that have a shorter useful life and can be depreciated over 5, 7, and 15 years from the nonresidential or residential properties with a useful life of 39 and 27.5 years, respectively. This accelerates depreciation leading to additional tax savings and cash flow.

Historically, a cost segregation study has been a very manual process completed by tax experts and specialized engineers. However, with new technology, the process of a cost segregation study is being completely transformed. Incorporating technology into the process increases efficiency and precision and allows for deeper insight.

Prior to implementing the new technology, a cost segregation study would require professionals to spend much time going over the architectural blueprints and conducting extremely thorough site visits in order to be able to classify the assets into the correct category. Tax law and engineering expertise was critical. The entire process was quite long and very manual which caused a barrier for investors with smaller properties.

Cost segregation offers many unique benefits including optimizing cash flow, deferring taxes and improving asset management. You’re able to defer taxes by accelerating the depreciation of specific assets which helps reduce your taxable income, thus deferring your tax liability into future years. By reducing your tax liability, this increases your cash flow and extra liquidity you have to reinvest in your real estate portfolio to help create exponential growth. Having the knowledge of the exact value of each asset helps you make better property management decisions such as making decisions on asset disposition, repair or renovations.

So what new technologies are being utilized in this process?

• Big data analytics: This technology has the ability to dissect and interpret very large databases for renovation and construction costs which would then determine if there are any costs eligible for reclassification or acceleration.
• Artificial Intelligence and Machine Learning: AI is able to quickly analyze large amounts of data to identify patterns and in turn make predictions. With training, machine learning may one day be able to classify assets into their respective useful life categories.
• 3D modeling and BIM Software: These two softwares have already dramatically changed the architectural plan and construction. For cost segregation studies, they are able to provide a deeper dive into the components of a building which helps create more accurate cost allocations.

Why is this beneficial?

• Much quicker turnaround times
• Increased accuracy
• Reduction in costs
• Can more quickly adapt to changes in the tax code
• Can be utilized for small or large properties.

While technology and a digital transformation creates efficiencies in the cost segregation study process, a tax expert is still crucial to the process. Professionals are able to utilize the data provided by the technology to use their strategic judgment to incorporate technical findings and provide client-specific recommendations.

Have you considered a cost segregation study? What further questions do you have for me?