Jerry Ferch

The IRS describes six different Cost Segregation methods on its website.  They are:

1. Detailed Engineering Approach from Actual Cost Records:  Plan documents, actual cost information, and an on site inspection meld into a report that takes  actual costs for items and services and imputes “soft” costs to arrive at “as built” costs for all components of the building.  This report is highly regarded and thorough.  It strongly substantiates the cost distribution to the various macrs depreciation terms.  This is one of the two most defensible cost segregation methods and is the one that is used second most frequently by www.CutFedTaxes.com.

2. Detailed Engineering Approach based on Cost Estimation: In this method, the property cost is allocated to its components, based on “reverse engineering” whereby the building is costed as if it was being built new today and a pro rata percentage contribution is calculated for the various components.  Lastly the actual cost of the building is allocated to the individual components, based on the calculated percentages.  This is the other very robust and highly defensible cost segregation method.  This is the method we use most frequently.  Click here for a free estimate of cost segregation for your building.

3. Survey Letter Approach: Providers to the original construction supply letters of cost verification.  The sum of these amounts should theoretically allocate the property cost to components, although every contributor must respond and everyone’s response must be HIGHLY DETAILED, the odds of which are very low.  We do not use this approach.

4. Residual Estimation Approach:  This approach is most like a real estate appraisal, in which certain component categories are estimated (like the aggregate dollar amounts applicable to 5-, 7-, and 15-year), with the leftovers dropping into 39-year straight line.  This is not highly documented and relies heavily on the credibility of the party rendering opinions of value.  We do not use this approach.

5. Modeling-Sampling Approach: If a building type is repeated (restaurant chain, franchise), the modeling approach is valid.  A first study is done to be used as a template for all others, with minor adjustments for each site.  The Sampling approach, takes a representative group of studies out of a large number of identical buildings and computes a composite depreciation template to apply to all properties.  The Modeling and Sampling approaches substantially reduce the Cost Segregation cost per building.  These are methods that we use at www.CutFedTaxes.com.

6. Rule of Thumb: The short definition of this is ”winging it”.  How it works is you allocate depreciation for your property as you see fit.  Since reasonably priced cost segregation by reputable consultants yields returns on investment up to 8,000%, we do not recommend Rule of Thumb.

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.