Summary: Cost Seg. is an underutilized strategy that commercial real estate investors can employ to reduce their taxes, improve their ability to fund new properties and increase their purchases. Below I have adapted information provided me by one of the nation’s leading authorities on Cost Segmentation Studies.
As we all have enjoyed our Holiday Season, sadly the next event we face involves the perennial tax deadlines. This year you could apply cost segregation and save considerable money. Cost Segregation is the least utilized and most cost efficient way to save tens and even hundreds of thousands of tax dollars on the commercial properties that you own, represent or manage. Unless you take action soon, you will forgo these tax deductions.
Reasons why you should learn more about Cost Segregation: Cost segregation is the spigot that taps the hidden “cash flow” in every commercial property, including apartments. Less than 10% of all commercial property owners have utilized cost segregation. The reasons vary but in general it is due to a lack of awareness and because the 1997 Supreme Court ruling requires than the cost segregation be prepared by an independent cost-engineer – not an accountant. In addition up until 2001, the cost of cost segregation services were prohibitive – this is no longer true.
Recent court rulings and changes in IRS filing procedures make this tax savings benefit fully accessible to owners of any size commercial property.
Property owners now need only file a single form accompanied by a cost seg report prepared by an independent cost engineer — no costly, formal, multi-stage appeal process is required. You can even file for a previous year’s reduction in Federal and state taxes. All these funds are “hidden cash flow” for the business owner. These monies become a new source of investment capital. In addition to these Federal tax benefits there are other significant monetary gains.
Big Dollar Returns – TRIFECTA of Cost Seg
One of the ways we deliver value to investors is to inform them of the benefits of Cost Segregation and to offer a free Cost Seg Feasibility Study. CS doesn’t apply in every situation, but the possibility of saving clients tens or hundreds of thousands of dollars is too much to pass up.
In essence, CS employs greatly accelerated depreciation on commercial real property assets. The improvements (not raw land) of a commercial real property are broken down into their components and then rated for their cost and remaining life. The building improvements are classified as either Section 1245 or Section 1250. S-1245 (basically tangible personal property) is the primary source of Investment Tax Credit savings. I will differentiate property types and the process of Cost Seg in a series of future posts.
This process is typically performed by Cost Engineers, not Cost or Tax Accountants.
Properties are normally depreciated at 27.5 years (multifamily) or 39 years (commercial and industrial improvements.) Clearly a washer and dryer have a shorter useful life and…cost seg permits depreciating that at a pace that reflects its actual remaining useful life.
Disspelling Cost Seg myths:
MYTH 1: “Cost Seg will increase my Alternative Minimum Tax payments.” Wrong! AMT will reduce the positive impact of Cost Seg slightly..but only slightly. It certainly does not increase AMT. My opinion: If I can save a lot on taxes, I’m in!
MYTH 2: ”CS is not fullytested.” Wrong! There is significant case law on this item; the IRS is well aware of the provisions. Read more
