Jerry Ferch

There is a national seller of cost segregation services that proudly describes, within a case study in its sales brochure, something I hope (for the sake of their client) the IRS never sees. 

What is it?  It’s a Cost Segregation Study for an office building that treats interior walls as movable partitions, eligible to be 7-year property.  The thinking was that, since the walls were not load bearing, they were “removable”, like office cubicles, for example.  This Cost Segregation Study generated great numbers and the client was probably very pleased with the results.  However, if they ever get audited, this client will be anything but pleased, because they are in violation of the law.  Interior walls, load bearing or not, are almost always 39-year property. 

One of our sister companies is involved in retail and office finish-out work and I have worked on the design and observed construction of walls that are legitimately re-usable and relocate-able.  To build an office with these types of walls is much more complicated than simple frame and drywall construction.  Our portable walls were pre-made in four, six and eight foot panels and they screwed and bolted together.  On the other hand the aforementioned purveyor of cost segregation purported walls to be “portable” just because they could be removed (demolished) without the larger building falling down.  That may work for them, but not for the IRS. 

The IRS requires the following for wall panels to be eligible for rapid depreciation:

1. The walls must be designed in such a way that it is clear that they can be removed and stored for later use.  The walls cannot be installed so that their removal of would bring about their destruction.  The design must allow the removal and storage of such walls to be accomplished without the walls being damaged.
2. It has to be financially feasible to engage in the use and re-use of such wall systems.  In the case of the construction done by our company, this client had a lease term that did not justify the expense of a build out.  Fortunately, because they had the potential (if they could not negotiate a lease extension) to remove their walls and re-set them in another building, our client could justify their office improvements now, because they could use the walls later, as well, and potentially even use them in another building. 

Who knows?  Maybe this client will never get caught, but, if they do, it will be a mess, complete with penalties, interest etc.  Please do not allow an enterprising well meaning consultant talk you into this – it is not worth the risk.

At CutFedTaxes.com, we are careful to apply the correct depreciation acceleration the first time.  We are not in the business of making you, our client, a test case.  Our mission is to maximize the depreciation acceleration to which you are legally entitled – not more, and equally important, not less. We provide a free no obligation estimate of the financial benefits of cost segregation, based on the specifics of your building. Just click the link, fill in the form, and we will send you the best estimate summary in the business.