Cost Segregation Study

What is a Cost Segregation Study?
A Cost Segregation study (also referred to as a cost segregation analysis, cost segregation or cost seg) is the process of identifying real property costs, typically in new construction or acquisitions. The objective is to accelerate depreciation for tax purposes. Cambridge Partners & Associates works with you to help minimize your taxable income through rigorous, aggressive and substantiated cost allocation strategies.

Is a Cost Segregation Study Beneficial?... You Decide
A business that has recently remodeled, constructed or acquired real estate can benefit from a cost segregation study. This type of study allows you to reduce your taxable income for the next several years. A cost seg study can have a dramatic impact on cash flow.

The current depreciation rules, Modified Accelerated Cost Recovery System (MACRS), require that a newly acquired or constructed building be depreciated over 39 years on a straight-line basis. Under certain circumstances, MACRS allows for the reallocation of a portion of the property into asset categories having shorter depreciable lives (e.g. 5, 7, and 15 years).

The objective in performing a cost segregation analysis is to shift property (and the associated dollars) from categories, which have long tax lives to categories, which have shorter tax lives. This allows for greater depreciation during the early years of the asset’s life, thereby lowering taxable income and thus lowering taxes. The result is improved cash flow.

How a Cost Segregation Study Works
A cost segregation identifies construction components that are necessary for the operation of the business rather than construction components that are required for the operation of the building.

The pure building components must be depreciated over 39 years (27.5 years for apartment type buildings). HOWEVER, the building’s construction components that are required for the operation of the business can be depreciated over a shorter period (usually 5, 7 or 15 years). The shorter asset lives increase depreciation in earlier years, and increased depreciation results in lower taxable income in these early years.

Cost segregation does not eliminate the taxes owed. Cost segregation defers the taxes owed to later years. This results in significant savings today! The after-tax savings can be well in excess of twenty times the cost of the study.

Following is a hypothetical example:

The assumed state and federal tax rate is 40% and the assumed discount rate (cost of capital) is 12%.
The building, either new or acquired, cost $5,000,000. A cost segregation study reclassified this cost as follows: 39 year property: $4,000,000; 15 year property: $250,000; and 7 year property: $750,000.
Based on these assumptions, the present value of the after-tax estimated savings are more than $180,000. You can put these cash savings to work for you now!

Who benefits from a Cost Segregation Study?
Among the types of property that will yield tax-saving benefits are manufacturing facilities, R&D centers, computer centers, medical facilities, office buildings, hotels, shopping centers, apartment buildings, assisted-living apartments, movie theaters, casinos and retail facilities.

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.

Cost Segregation Study - Frequently Asked Questions

Noteworthy Assignments
Cost Segregation studies recently completed by Cambridge Partners include:

Major office building on Chicago’s Michigan Ave - ($121MM purchase price - 35+ stories)
A major Midwestern World Trade Center - ($56MM purchase price - 50+ stories)
A $246MM fiber-optic manufacturing facility
A $21MM dairy processing facility
Cost segregation study of a newly remodeled Hilton Double Tree Hotel
Cost segregation analysis of a newly acquired Wyndham Hotel
Cost seg study of a recently constructed Railcar manufacturing plant
Cost seg of a recently acquired 46 story office building and executive hotel in downtown Chicago
Cost segregation of a newly acquired and remodeled Miami Florida beachfront hotel
Cost segregation of four recently acquired hi-rise office buildings in Denver, Colorado
Cost segregation reports for eleven (11) mid-rise apartment buildings in Chicago
Cost segregation of a multi-tenant medical practice doctors building in Detroit
Cost segregation of numerous food processing facilities as part of a series of acquisitions
Cost segregation of six apartment buildings in various Los Angeles California locations including Koreatown, Hollywood and Beverly Hills
Cost segregation of a recently purchased grocery anchored strip mall center in Naples, Florida
Cost segregation of two well known office buildings on LaSalle Street in the financial district of Chicago
Cost seg study of two newly constructed MRI imaging facilities located in northern Michigan
Cost segregation of a portfolio of bank branches acquired as part of a bank merger
Cost segregation studies of more than fifteen (15) indoor shopping malls located in various states, including: Washington, Wisconsin, Texas, Idaho, Connecticut, Utah, Missouri, Kentucky, Ohio and Pennsylvania
Cost seg of a food production and distribution facility in Cleveland Tennessee
Cost segregation of magazine and phone book printing plants in Tampa Florida, Spartanburg South Carolina and Suburban Chicago
Cost segregation of three suburban Florida retail shopping centers in Lake Wales, Palatka and Temple Terrace
Other retail, office, apartment, corporate headquarters, theatre, research, manufacturing, food, pharmaceutical, medical, and special purpose properties.