By Cindy Blumenfeld
I like to think of it as a gift with purchase. A cost segregation study identifies and reclassifies real property to personal property. Think about your building as a dollhouse, now pick it up and turn it upside-down; everything that falls out is personal property, meaning it can be removed.
Traditionally commercial real-estate is depreciated straight line method over 39 years. Well the truth is that nothing in that building is going to last 39 years. Components like carpeting, pluming, and furniture even down to the wiring in electrical systems should be reclassified. The IRS has released the Audit technique guide, which serves as a reference for an engineering company to allocate these components to 5, 7 or 15 year lives.
What that means is cash flow to the property owner. The typical benefits of a cost segregation study are 7-10% of the purchase price or build cost realized back to the owner within the first five years. Some aggressive CPA firms may be doing some safe methods of accelerating their clients’ depreciation but in no way can achieve or justify the level of benefit that can come from an engineering firm who specializes in this. Afterall, how would a CPA know what your insulation would cost to replace?
Speaking of replace brings me to the insurance aspect. An Engineered Cost Segregation Study gives the ability to substantiate the replacement costs to the insurance carrier. This enables an insurance agent to go to their underwriters for the most aggressive pricing. The underwriter will have a very high comfort level of the risk due to the comprehensive building review in their file.
What if something happens to your building? I am sure we have all played the insurance game and it can be quite frustrating trying to collect for what you need to replace or repair.
A cost segregation study can serve as a substantive document that an owner can use as support to a claim that is being disputed to their favor. The depth of our reports helps an owner to avoid the need to hire a third party professional to justify their claim.
To an underwriter this becomes a disclosure safeguard whereby at time of claim the owner is able to substantiate a full disclosure position with the insurance adjuster which puts the onus on the carrier to pay!
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Engineered Tax Services