Jerry Ferch

The greatest benefit of Cost Segregation is that it provides a property owner with the fastest legally permissable depreciation, which immediately reduces taxable income and taxes.  By accelerating depreciation, Cost Segregation dramatically alters when you pay taxes, deferring tax expense from fifteen to forty years into the future.

Assuming you have gotten your free estimate, decided to do Cost Segregation, and completed your Cost Segregation Study, you may wonder what the process is whereby you get to realize the reduction of tax payments? Since there are two basic situations under which one will do Cost Segregation, there are also two basic approaches to realize the tax changes:

The first situation is very simple.  This is when you have done Cost Segregation at the time you acquired the property and, under these circumstances, Cost Segregation is the “template” for creation of your depreciation schedules.  Most likely, your depreciation schedules will be done  by your accountant, who will take the depreciation assignments from your Cost Segregation Study and input them into their asset management software  to create your depreciation schedule.  This depreciation schedule is then used in your future tax returns to supply the correct depreciation amount every year.

The second situation is more involved.  This is when you have already owned a building for some period of time.  In this case, Cost Segregation provides two distinct benefits: 1) It allows you to change your depreciation tables so that depreciation in the current and all future years is done correctly, and 2) It enables you to recover the additional depreciation you should have taken from all prior years in a single one time adjustment.  When Cost Segregation is done for a previously owned property, it is called “Look Back” Cost Segregation.  Like any study, it will contain tables with the correct depreciation assignments that should be applied from day one.  That said, when correct depreciation is not applied from day one, then the property owner must change all future depreciation entries by revising the depreciation schedules for the current year and all future years, which is something that would typically be done by the owner’s CPA.  Also, he must make a one time adjustment to recover previously unrealized depreciation by completing one section of a document called IRS Form 3115 to announce the change in depreciation method.  In addition, a memorandum must be attached explaining the prior depreciation method, what depreciation changes were made, why the changes are justified, and what the one-time tax adjustment will be.  This memorandum can be done by your CPA or by our company.

Your Form 3115 adjustment is entered in one place on your taxes and the corrected current depreciation in another.  That’s all there is to it.  It is painless, relatively simple and (of course) completely legal.