Cost Segregation Study - Frequently Asked Questions
- Does my accountant perform Cost Segregation Study?
- Are Cost Segregation Studies expensive?
- I will get the real estate depreciation in the
future, so why have a cost segregation study?
- What types of companies use cost segregation studies?
- Does my property qualify for a cost segregation
Does my accountant perform Cost Segregation Analysis?
Generally the answer is no. Very few CPA firms have experienced
cost segregation engineers on staff to inspect the property, examine
blueprint drawings and analyze cost data. Accountants often attempt
to capture some of the qualifying deductions, but without engineering
expertise, they will not be able to accurately quantify the qualifying
Section 1245 property and thus achieve proper tax savings.
Cost segregation studies employ engineering, cost-estimating procedures,
and tax knowledge to identify shorter-lived assets qualifying for
5-, 7- or 15-year write-off periods, rather than the usual 27.5
or 39 years for building and acquisition costs.
Are Cost Segregation Studies expensive?
Fees are not expensive relative to the overall benefit. Fees typically
range from $10,000 to $35,000, however a cost segregation study
project fee will vary depending on the building size, type of facility
and overall complexity of facility. Users of engineering based cost
segregation studies routinely receive present value cash-flow savings
of 20 or more times their investment for the cost segregation study.
Cambridge Partners & Associates will not suggest a cost segregation
unless we believe it will yield a positive return on your investment.
Most users of cost segregation receive significant cash flow benefits,
so much so that once they have a study performed on one of their
properties, they have studies performed on all of their owned real
I will get the real estate depreciation in the future, so why
have a cost segregation study?
Yes, without a cost segregation analysis you will get the depreciation
on a straight line basis over 39 years. This is because without
a cost segregation study all of your building will be considered
IRS Section 1250 depreciable property. If you own equipment, you
probably already know that for tax purposes it depreciates over
7 years (sometimes 3 or 5 years). A cost segregation analysis is
the process of identifying components of a building that get treated
as if they are equipment, and therefore depreciated over a shorter
time horizon. Would you rather depreciate your machinery & equipment
over 39 years? The answer is “no” because you want the
benefits of this depreciation today.
What types of companies use cost segregation studies?
Cambridge Partners & Associates has been engaged to provide
cost segregation studies of: industrial manufacturing buildings, for-profit
hospital, hi-technology research and development laboratory, properties owned by
Real Estate Investment Trust (REIT), hotel, motel, hospitality, restaurant, bank,
medical building, office building, apartment building and apartment complex,
distribution facility, refrigerated cold storage, dairy, food processing, warehouse building,
and the list goes on. Virtually all owners of real estate benefit from having a cost segregation study performed, 1031 like
kind exchange transactions (1031 exchange) included.
Does my property qualify for a cost segregation analysis?
Your property could have a cost segregation analysis if it was
recently acquired, recently purchased, or recently renovated. We
have performed cost segregation studies on properties purchased
for as little as $500,000 to as much as $275,000,000.
If you purchased, renovated or constructed your building a few
years ago, but did not elect to have a study performed, please take
note: There are still potentially huge benefits awaiting you if
you have a cost segregation analysis performed. The Internal Revenue
Service (IRS) has a simple form (Form 3115) which allows property
owners to make a change in their accounting method, including a
change in prior years depreciation.
If you purchased your building(s) as part of a larger acquisition,
you will first require a purchase price allocation appraisal (see
FASB 141 appraisal) to determine the amount of the purchase price
which should be allocable to your real estate, machinery &
equipment and identifiable intangible assets. Regardless, an acquisition
is an opportune time to have a cost segregation study performed,
because you as an owner generally are able to reset the tax basis
of the assets acquired (regardless of the asset, tangible or intangible).
If your acquisition was a 338(h)(10), you should also consider
having a cost segregation performed. The 338(h)(10) election allows
your stock purchase acquisition to be treated like an asset purchase
acquisition. In other words, the tax basis of the real estate, machinery
& equipment and intangible assets can be stepped up to the new
appraised value and be depreciated accordingly.
If you would like additional assistance or would like to discuss a potential cost segregation analysis project, please contact Cambridge Partners & Associates for an initial evaluation consultation.