Investors are increasingly turning to Cost Seg.

Not every tool is appropriate for every investor, but my job is to make them aware of what is available to them so they can make  informed decisions.  One of the tools that has been around for years, (but is only now starting to see much application,) is Cost Segmentation.  Most investors use depreciation as part of their tax deferment strategy; cost seg. greatly accelerates the permissible amount of depreciation in the first years of ownership.  The effect is to offset much of the current tax liability from profits of operation.  For some investors it offsets all current profits and provides a hedge for income derived outside of the producing property.

Investors love getting depreciation on appreciating assets!

Cost Seg simply lets them get more of what they want…and earlier.  What’s not to like!  It works like this:  the concrete in a building has a much longer life than a washing machine…even if it’s a Maytag.  It makes sense to permit the apartment owner to use an accelerated depreciation schedule on the washing machine, the drapes, the pool equipment, etc., than the concrete.  For years some accountants have cherry picked a few items that were obvious and used shorter “dep scheds.”  Cost Seg is the same process…but on steroids.  The “bright line” ruling on this is that for Cost Seg studies a “Cost Engineer” (not “Cost Accountant”) must perform a site inspection to determine what components are subject for accelerated depreciation.  There are tables with thousands of components…each with their individual depreciation schedules.  The accumulated list of items sets the basis for what may be used in which years. 

What’s the best time to initiate Cost Seg.?

The most fruitful time to have the experts perform a cost seg study for a project is at acquisition.  Years later it may still make sense…but its aways best from the first year of ownership.  For this reason I believe that it is the duty of a (good) investment broker to inform his clients about cost seg.  Even more so than a tax accountant.  Some tax accountants see cost seg as a threat to their position rather than an adjunct to their valuable services.  The real litmus test should be: “What’s best for the client?”

What does it cost? Where do I sign up?

Costs vary from project to project based on complexity.  That permits it to be a viable tool on $500,000 acquistions as well as mammoth developments.  For every dollar invested in Cost Seg you will likely get a much higher return than you do on the property itself.  Much higher. I talk several times a week with a Director of the largest Cost Segmentation provider in the nation.  One of the services that I offer investors (whether they are my client or not) is a no cost cost seg feasibility study.  I ask for the opportunity to be of service.  Please contact me at: 503.577.1034, or rick@rosecitycre.com.

This entry was posted on Wednesday, May 13th, 2009 at 3:04 pm and is filed under Demystifying Investing, Investment Insider. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.