Another misleading presentation on cost segregation

[Michael Plaks]

Cost segregation is a great tax strategy when applicable. I certainly endorse it and implement it for my clients. Again, when applicable. 

What I cannot endorse is the misleading presentations by some cost segregation companies to sell their services. I have posted about it previously:
https://www.biggerpockets.com/forums/51/topics/831924-beware...
https://www.biggerpockets.com/forums/51/topics/1191846-cauti...

Here is one more example, this time from a presentation made to CPAs by a prominent cost segregation company. They presented a juicy case study to illustrate the benefit of depreciation recapture shifting from cost-segregated personal property to real property. No, I'm not going to explain the concept here. It's highly technical, but most importantly it is valid. Indeed, there IS a tax benefit! 

Except not nearly as high as claimed by this cost segregation vendor. To understand how they pushed their numbers so much into their favor, we have to actually look at their numbers. Something they hope we never do.  

The bottom line of this table tells us the results of cost segregation. They took a $1.5 MM property and found in this property:
- $250k worth of 15-yr property which is paved parking, fencing, landscaping etc.
- $150k worth of 5/7-yr property which is appliances, cabinetry, carpets etc.

This is pretty typical for a commercial property cost segregation, and I see nothing wrong with it.

The problem is in the line above that, called "Selling price." It represents allocation of the sales price when they sold this property later on. They allocated $15k selling price to the 5-yr property initially valued at $150k. 

What they are basically selling is that we bought $150k worth of appliances/cabinetry/carpets etc with the property. But when we sold the property, it was so worn out that it was only worth $15k, or 10% of its value at purchase. While the building envelope itself doubled in value. Maybe a brand new carpet did lose 90% of its value. What about the rest of it though? Call me skeptical, because I am.

Now, if for whatever reason this was a fair allocation, and the 5-yr property indeed lost 90% of its value while in our hands - then the impressive tax savings they boasted about would be valid as well. 

Otherwise, it is what we call a streeeeeeeeeeeeeetch.