Q: What is Cost Segregation?
A: Cost Segregation is a strategic and widely accepted tax planning approach that allows commercial real estate owners and tenants to accelerate depreciation deductions, significantly improve cash flow and defer taxes.
Q: How long do I need to own the commercial property for Cost Segregation to make sense?
A: We recommend for a client to hold a property for a minimum of 3-5 years in order for cost segregation to make sense.
Q: What types of properties qualify for cost segregation?
A: Any type of commercial property will qualify for a cost segregation study. Also, any size property will qualify. However, the cost-to-benefit breakdown may not be as favorable. Commercial buildings and leasehold improvements with a cost basis of $300,000 will qualify for a cost segregation study. This value drops to the $150,000 range when considering cost segregation for residential rentals.
Contact us for a no-cost proposal.
Q: How much will it cost?
A: The price of a cost segregation study is based on time and materials involved to complete the project. We make a fee determination based on looking at similar past projects in our portfolio. We also will look at the size, type, scope, and complexity. Typical fees can range from $5,000 to $20,000 for commercial buildings and apartment complexes. Call for fees for residential rentals.
Q: What is Bonus Depreciation?
A: Because of the Tax Cuts and Jobs Act (TCJA), commercial real estate owners now qualify for substantial tax benefits. Owners who purchased either residential rental or commercial property and closed on or after Sept. 28, 2017, can see significant tax benefits as a result of the bonus depreciation being applied to “used” property.
Owners and investors who acquire used property (property that has been used by previous owners) are now able to take the same tax benefits as owners and investors who constructed or purchased “new” property. Under TCJA, qualifying assets that have a tax recovery period of 20 years or less, new and used, can now qualify for the 100-percent bonus depreciation provision in the assets’ first year of service.
This means that performing a cost segregation study will now have a stronger impact. Any assets that are removed from the “real property” classification and placed in the “personal property” classification may now be eligible for bonus depreciation and can be immediately expensed in the first year.
Q: How does the IRS view cost segregation studies?
A: The IRS effectively endorses cost segregation studies. The IRS Cost Segregation Audit Techniques Guide describes cost segregation.
"When only lump-sum costs are available, cost estimating techniques may be required to 'segregate' or 'allocate' costs to individual components of property (e.g. land improvements, buildings, equipment, furniture, fixtures, etc.). This type of analysis is generally called a 'cost segregation study,' 'cost segregation analysis,' or 'cost allocation study.'"
The primary concern of the IRS is that the cost segregation study be performed following detailed methodologies by engineers, architects, and other professionals with expertise in construction cost estimating techniques.
Q: How long does a Cost Segregation Study take?
A: A Cost Segregation Study normally takes around 60 days – 75 days to complete.
Q: Why hasn’t my CPA told me about this?
A: Most CPA Firms do not have an engineering department to perform cost segregation studies. Cost Segregation is a specialty service which requires the knowledge of engineering, construction methods, and IRS code.
Q: Will a Cost Segregation Study put me at risk of an IRS audit?
A: No, our Fully Engineered and Accounted Cost Segregation Study will NOT trigger an audit. ELB’s methodology is bullet-proof in the unlikely event of an IRS audit. Should you experience an audit, ELB provides lifetime defense of our study at no added cost.
Q: Are all Cost Segregation Studies the same?
A: ELB performs what is called a “fully engineered and accounted” methodology, which is forensic in its detail of both accelerated property (5, 7, and 15 year items) as well as the straight-line (39 or 27.5 year items), which maximizes the allowable IRS deductions. The typical ‘engineering-based’ reports from other cost segregation providers do not provide the same level of detail in accelerated property, and usually bundle the straight-line property in just a few categories resulting in less IRS deductions.
This puts less money back in your pocket.
Why does this matter? First, ELB’s “fully engineered and accounted” methodology delivers complete asset management detail on all accelerated and straight-line items. The engineering-based studies identify just the standard items and miss the hidden electrical, plumbing and mechanical details, leaving your money on the table. Secondly, ELB’s report serves as an asset management report allowing you to easily identify future abandonment / disposition of items for future upgrades, improvements or repairs, in full compliance with the IRS Tangible Property Regulations.
Q: Does the property have to be a new purchase or newly constructed to benefit from cost segregation?
A: No, Properties placed in service in years as far back as 1987 may benefit from a cost segregation study. Studies for properties placed in service in prior years are called 'look back' studies.
Can I use Cost Segregation on buildings I placed in service in the past?
A: Absolutely, a look-back study should be performed on properties purchased, constructed or renovated in the past 15 years or more.
Q: Will I have to amend my tax return on a property when a cost segregation study is performed?
A: No, An amended return is no longer necessary to fix depreciation in prior years. In place of an amended return, the IRS has issued Revenue Ruling 2004-11, which allows a taxpayer to file a Form 3115 (Automatic Change in Accounting). This allows the taxpayer to take any missed deductions in the current year.