Cost Segregation FAQ
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 study?
Generally the answer is no. Most of the large regional and national accounting firms have the capability to perform cost segregation studies, but overall we find 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.
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 estate properties.
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.
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.
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 ASC 805 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.