Cost Segregation Reclassification Percentages

[Julio Gonzalez]

Cost segregation can be utilized for many different scenarios such as new construction, properties already owned and newly purchased properties. Generally, the properties that benefit the most from a cost segregation study are properties that are remodeled, expanded, purchased or constructed after 1987, the year in which the Investment Tax Credit was enacted.

The cost segregation studies that typically yield the highest credits and deduction are for properties valued at $150,000 or more or that have lots of added features such as components to operate or high-end custom finishes. The typical clients that seek out cost segregation studies include:

• Real estate companies that buy and sell multiple properties each year.
• Individuals with a portfolio containing investment properties including apartment buildings, multi-family homes and even single residences.
• Franchise owners with properties that are similar to one another such as assisted living facilities, storage facilities and golf courses.
• Business owners of hotels, food facilities, shopping centers, restaurants or manufacturing plants.

It depends on the type of property, but generally 15-45% of the building’s costs can be classified into assets with a shorter life. The more land that a property includes, the more it benefits due to the personal property. Some examples of properties with high asset reclassification include medical clinics and hospitals with technical machinery and labs, grocery stores with machinery, shopping centers with rainwater drainage systems and large parking areas, industrial manufacturing facilities with advanced equipment, apartment buildings in suburban areas with swimming pools, golf courses, tennis courts and large parking areas for tenants.

Here’s a list of the average amount of assets that can be reclassified into shorter asset life classes based upon the type of property.