What is a Cost Segregation Study?
An engineering-based cost segregation studyis a tax planning tool that can dramatically lower income taxes. It’s based on a detailed process that identifies all the costs associated with a building’s purchase, construction, or renovation. Each cost identified is assigned its shortest possible recovery period per IRS guidelines. This allows owners to increase depreciation deductions, reduce their income tax liabilities and maximize cashflow from their real estate investment.
Who Qualifies for a Cost Segregation Study?
You may qualify for cost segregation study if:
- You have taxable income
- You have purchased, constructed, or renovated (including tenant improvements) a commercial or rental real estate property in the last 20 years
- Your purchase or construction costs are $250,000 or greater
How is a Cost Segregation Study Conducted?
The first step in the process is to make sure you qualify. This is done through a detailed, no-cost analysis that will determine the benefits from a study as it relates to your personal tax situation.
Once that step is completed, the cost segregation study will include the following steps:
- Accumulation of all appropriate documentation such as construction drawings, purchase agreements, appraisals and building plans.
- A site visit to determine the accuracy of the building plans and to identify those building components that qualify for a shorter recovery periods. This is documented through measurements, pictures, and field notes.
- We then use specialized engineering software that integrates your building plans and allows us to calculate the measurements and counts of all your building components.
- This information is downloaded into proprietary software that is then used for pricing and assigning of the appropriate recovery periods.
- The study process is completed by a thorough review and documentation of the tax law that allows you to assign a building component to a shorter recovery period.
If the study is being done on a property that you had constructed or purchased in a prior year, we also work with your CPA to provide them the appropriate information to file IRS Form 3115 (Change of Accounting Method).
Why Choose Veracity?
Not all cost segregation studies are created equal. While the IRS allows broad latitude in how a cost segregation study may be performed, we at Veracity believe that an engineering-based study is the most cost effective and produces the highest possible benefits. Veracity’s cost segregation professionals are industry specialists who have years of experience in performing these studies. Veracity’s leaders and staff have the depth of knowledge and expertise required to perform the complex tasks associated with a proper cost segregation study and the tax expertise to help you maximize the benefits.
Frequently Asked Questions
Most accountants depreciate equipment and other visible costs (such as parking lots and carpeting) at 5, 7 or 15 years. Veracity’s cost segregation specialists are able to identify costs that can’t be readily seen, such as the wiring and plumbing needed to run equipment. We have found that our process results in identifying costs that can be reclassified as 5-year, 7-year and 15-year recovery periods that typically exceed 200 percent to 500 percent of what an accountant alone can capture.
Yes, but it will take 27.5 or 39 years and you will miss the benefit of having additional cash flow to invest in your business now. With a cost segregation study, it is not unusual to generate $50,000-$200,000 of additional cash flow that is available to re-invest however you choose. The benefit will depend on the building complexity as well as the cost of the building.
Usually not. However, there are special rules that may apply in this situation and we can help you navigate those specific tax laws.
No. You only need to file IRS Form 3115 (Change of Accounting Method) that allows you to take the “catch-up” depreciation in the year you wish to apply the study. We can assist your CPA in completing this form and will provide the appropriate supporting schedules.
In all of our projects we prepare an initial detailed no-cost analysis to determine the benefits of doing a study. From this analysis we determine the cost of the study and then you can make a final decision whether a study would be beneficial to you. The study fee is 100 percent deductible and, from our experience, the benefit will be three to up to 25 times the cost of the study.