Cost segregation is a sophisticated tax planning strategy that allows building owners to better identify asset components with shorter depreciable lives to achieve tax savings, increase cash flow and allow for proper asset management. 

The benefits of conducting cost segregation studies include:

• An immediate increase in cash flow
• A reduction in current tax liability
• The deferral of taxes
• The ability to recapture “missed” depreciation deduction from prior years 

Any commercial property or income-generating property – constructed or already existing – that is owned by a tax-paying entity or individual is a candidate for cost segregation. 

Cost Segregation Requires A Quality Study, Documentation And A Report 

There is one outstanding controversial topic where cost segregation is concerned. The distinction of tangible personal property versus a building’s structural components requires factual determination, which is why engineering-based cost segregation studies are the most effective to realize and quantify your building’s depreciation benefits. 

It’s important to bring in a tax expert who is well versed in cost segregation analysis, and has an engineering background, to ensure the study is conducted correctly. The IRS specifically states, “… in general, it [an engineering-based cost segregation study] is the most methodical and accurate approach, relying on solid documentation and minimal estimation.” 

An engineering-based cost segregation analysis identifies building components such as electrical installations, plumbing, mechanical components and finishes. Tangible personal property is segregated in project costs that are embedded in the building. Items such as carpeting, wall coverings, partitions, millwork, lighting fixtures, suspending ceilings and doors are often segregated from the project and may be depreciated over shorter lives. 

The Timing Of A Cost Segregation Study

A cost segregation analysis may be used for buildings recently constructed or purchased, or buildings already in service (especially if the building was placed in service after 1986). When a cost segregation study is completed for a building already in service, the result is a catch-up depreciation opportunity based on deductions that could have been taken over time. 

Accelerating these deductions is a catch-up provision that makes conducting a cost segregation study very attractive to property owners. 

Is A Cost Segregation Study Right For You?

While cost segregation studies provide immediate tax savings and an increase in cash flow, there are two potential side benefits: insurance cost savings and estate planning advantages. 

In the end, a cost segregation study provides significant benefits for most commercial real estate owners. When you accelerate the depreciation of your building, tax savings are maximized and money goes back into your pocket. 

Ready to learn more about cost segregation services with an engineering focus? Call 866-444-4880 or click here to speak directly with an experienced tax expert at Corporate Tax Incentives.