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  • Writer's pictureBill Summers

What is a Cost Segregation Study and why should all owners be doing this?

CSS is an IRS approved tax strategy, segregating and reclassifying real property assets to personal property classifications, thus accelerating depreciable assets allowed, requiring a detailed yet non-intrusive engineering analysis of the buildings walls, floors, ceilings, electrical, and mechanical systems to determine their cost as it relates to the entire building.

  • By reclassifying building assets to a shorter depreciable class life, therefore increasing your  depreciation deductions, and reducing the taxable liability to increase cash flow, improving your ROI

  • A Cost Segregation study allows a taxpayer who owns real estate to reclassify certain assets as              Section 1245 property with shorter useful lives for depreciation purposes, rather than the useful life        for Section 1250 property.

Applies to:

  • New and existing commercial buildings

  • Existing buildings undergoing maintenance

  • Leasehold improvements to facilities

  • REIT’s

  • 1031 exchanges

The Key Elements to a Cost Segregation Study are:

  • A cost segregation study identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income tax obligations. Personal property assets include a building’s non-structural elements (modular/prefab equipment), exterior land improvements and indirect construction costs.

  • The primary goal of a cost segregation study is to identify all construction-related costs that can    be depreciated over a shorter tax life (typically 5, 7 and 15 years) than the building (39 years for    non-residential real property).

  • Personal property assets found in a cost segregation study generally include items that are affixed to the building but do not relate to the overall operation and maintenance of the building.

  • Established in 1986 with the Tax Reform Act, but 1999 was a great year for people who own real estate, especially those who own Commercial buildings. Why? For one, in an IRS legal memorandum issued in April 1999 where the IRS finally acquiesced on allowing taxpayers to segregate various building costs into shorter depreciable lives other than the 39 or 27.5 years.

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