Jerry Ferch

Cost Segregation In A Nutshell…

Since 1997, increasing numbers of commercial building owners have cut their current income taxes by using Cost Segregation.  With Cost Segregation, a shopping center owner recently changed 30% of their property cost from 39-year depreciable to 5-, 7-, and 15-year depreciation. Accelerating this depreciation reduced federal taxes for ten years!

What is Cost Segregation?  A Cost Segregation Study (CSS) is a systematic engineering-based analysis of expenditures for a new building, a renovated property, or an existing structure.  A CSS separates the cost of a building into classifications alllowing the most rapid legally permitted depreciation.  In 1997, the Tax Court ruled that many parts of a building can be depreciated sooner than a 39-year straight line.  For example, certain electrical can be depreciated in 5-years and vinyl wall covering in 7-years.  Site improvements are depreciated over 15-years.  Hundreds of building components can have depreciation accelerated.  Cost Segregation finds them for you.

Why do Cost Segregation?  The greatest benefit is the fastest legal permissible depreciation, immediately reducing  taxable income.  In a 35% bracket, every dollar of depreciation cuts taxes by 35 cents.  Tax cuts can continue up to fifteen years.  Another benefit is that cost segregation costs out many components of a building so that, if that component must be replaced, it can possibly be made an abandonment loss, reducing the basis, and changing more of the “gain at sale” from short term to long term.

How does Cost Segregation work?  The best Cost Segregation method is identified by the IRS as the engineering approach.  An expert analyzes the building(s) in person.  He itemizes the components in the building and determines how much each represents as a share of the property cost.  Then, the components are assigned to the correct depreciation terms.  The consultant writes up the findings with an executive summary, a detailed report, depreciation assignments, and other documentation required by the IRS.

What will Cost Segregation do for your building(s)?  The exact results depend on the details, but, as an example, for an office building worth $3 million, cost segregation will cut federal taxes by $150,000 in the first five years.   If there is state tax, the tax cut will be even bigger.  The return on investment is typically 1,000% to 3,000%, although we’ve seen ROI’s up to 8,500%.  Cost Segregation yields first year tax reductions between two to ten times its cost.

The National CPA Trade Association (American Institute of CPA’s (AICPA)) recommends cost segregation for any property with a cost basis of $750,000 or more.  Depending on how detailed of an analysis is required by the building owner, we have seen excellent results for properties costing as little as $500,000.  To assess the potential of Cost Segregation for your commercial property, www.CutFedTaxes.com offers a free estimate for any property.  Our analysis is the best summary of cost segregation potential in the industry.  It is available at www.cutfedtaxes.com/free-estimate.  You can also email your property cost, purchase date, and land value to info@cutfedtaxes.com. We’ll quickly calulate a plan and send it to you.