Overview of Cost Segregation
Cost segregation studies are used to accelerate depreciation deductions, defer income tax, and improve cash flow. These studies allow property owners to accelerate deductions by identifying components of their buildings that can be depreciated over five, seven, and 15 years as opposed to the standard 39 years (27.5 for residential). Qualifying elements can include certain types of lighting, millwork and wall covering as well as a portion of the building’s electrical and mechanical system to name a few. Site improvements such as curbing, sidewalks, drainage and landscaping also qualify.
The process, which is based on a detailed engineering analysis, involves an in-depth review of all relevant property information including cost data, lease agreements, and building plans as well as a thorough on-site inspection by the cost segregation engineer. The engineer then dissects the building costs and classifies them to the appropriate depreciable lives. Soft costs such as engineering, fees, builder’s overhead and profit and construction period interest are then allocated in accordance with the findings of the CSS. The result is a comprehensive report which includes a detailed breakdown of costs associated with the property.
Benefits of Cost Segregation
1. Reduction in Stae & Federal Tax Liabilities
2. Insurance Cost Reduction
3. Increased Cash flow through accelerated depreciation
4. Alliances between enginnering, banking, construction and accounting
are formed
5. Potential reduction in real estate property taxes
6. The study cand assist in cost reduction of prposed construction of
new buildings.
7. Corrections for misclassified assets allows the ability to "catch up"
in the current year
8. Improve ability to financially qualify for credit