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The History of Cost Segregation

You may hear the term “cost segregation” and know that it is a specialty tax study, but do you know the history? In the past, a building was treated as a single asset where each of the internal components that made up the building were all calculated as one single asset value that was depreciated over 39 years. This meant that over the term of 39 years, the tax deductions would remain exactly the same year to year. 

However, most components within a building do not last 39 years such as carpeting, lighting, heating or cooling systems, landscaping, and land improvements. From a tax standpoint, it is inefficient to depreciate an asset over 39 years when some of its components will truly be disposed over a 15-year period or less. Treating the building under this traditional depreciation method makes it difficult to manage cash flow.

history of cost segregation

In 1962, the Investment Tax Credit Act was enacted to increase interest in investments and reduce recession and inflation. Since then, this legislation has been changed and reinterpreted many times.

The Hospital Corporation of America v. Commissioner Impacted Cost Segregation

The monumental case to provide the largest impact on cost segregation was in the 1997 court case decision of The Hospital Corporation of America v. Commissioner. It was concluded that for certain assets, the possibilities to accelerate the timing of depreciation shall be further expanded. After the ruling, with the accelerated method of utilizing 5, 7 or 15-year rates of depreciation, certain costs are now classified as personal property or land improvements.

Without segregating costs, these assets are imposed to a 39-year or 27.5 – year depreciation rate for each expense, which results in a much higher tax liability.

Short-term asset segregation of building components that are non-structural in nature include fixtures, flooring, cabinetry, internal piping, landscape, parking lots, land improvements, mechanical systems, lighting systems, special electrical work, and building finishes. When a proprietor segregates these assets from the structural portions of the building, cost segregation can become a powerful tax planning tool for maximizing tax deductions that lead to great wealth preservation by managing a property owner’s investment in the most tax-efficient manner.

Today, property owners are recognizing additional tax benefits by applying cost segregation studies in different situations including the purchase of a new property, new facility constructions, renovations, or expansions of existing buildings. Real estate companies, franchisers, business owners, and high net-worth individuals are now using these studies with many properties within their portfolios. Not all properties will qualify for depreciation deductions so it is important that all parties understand the process and provide the most accurate information available. Often certain limitations within the law are what makes it critical for the property owner to have the most skilled professionals conducting their studies.

The final IRS regulations relating to tangible property were issued in September 2013 and provide for additional write-offs for most taxpayers. It is important to have a team of specialists that can assist in creating required capitalization policies and identifying expenses for repairs and maintenance to reduce tax liability and improve cash flow. 

Having a cost segregation analysis done on your property is the most accurate way to see how much savings you qualify for.

Having a cost segregation analysis done on your property is the most accurate way to see how much savings you qualify for.

Case Study: Restaurant

cost segregation case study

eBook: Property owners guide to Cost Segregation

Learn how you can significantly increase your tax savings with a Cost Segregation analysis.

Tools: Dispostion Calculator

Calculate a disposition deduction for fixed assets removed, demolished, retired or no longer in service.

Webinars: Cost Segregation

Testimonials: Our valued clients

Melissa Flagstad, Partner
Melissa Flagstad, PartnerUS Facilities Lighting
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“Engineered Tax Services (ETS) found 250k in tax credits for one of our manufacturing clients. ETS makes our business bigger and stronger. Not much more you can ask from a partner.”
William Mays
William MaysGoldin, Pesier & Pesier, LLP
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“The entire ETS team includes professionals of the highest caliber…they have proven to be a true partner to our firm – as well as the clients we have engaged. With ETS, we have added Section 179D to our service offerings. This has gotten us to the table with many coveted prospects with whom we had been previously shut out. ETS is an outstanding partner, demonstrating high intelligence, entrepreneurial spirit, expertise, quality, professionalism and responsiveness. We are looking forward to incorporating their cost segregation services for the benefit of our clients in the near future.”
Goldstein Schecter Kosh
Goldstein Schecter KoshGoldstein Schecter Kosh
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“Engineered Tax Services has been a very valuable engineering resource to our firm over the past decade. We find their firm the only licensed engineering firm to be uniquely qualified to handle the complex issues regarding cost segregation, 263a, 179D and repair and maintenance. We did our due diligence and the results speak for themselves as Engineered Tax Services is the dominant engineering resource to the CPA community.”
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Tele-Engineering™: A Contactless Study as a COVID Safeguard

While traditionally cost segregation studies are conducted onsite, the COVID-19 pandemic calls for a safe alternative—one that provides you with the same ability to reduce tax liabilities and increase cash flow.

Tele-Engineering – a virtual approach to cost segregation – offers the same high level of detail and support as in-person visits, while eliminating costs and social safety issues.

Case Studies

Apartment Building

Cost Segregation study on a $2.6 Million Apartment Building in Jenks, OK

Without a Cost Segregation study, a $2.6 Million Apartment Building in Jenks, OK, purchased in 2019 would have generated a 1st year depreciation of $38,888.89. …

Apartment Building

Cost Segregation study on a $392,000 Apartment Building in Hillsborough, NH

Without a Cost Segregation study, a $392,000 Apartment Building in Hillsborough, NH, purchased in 2019 would have generated a 1st year depreciation of $8,469.14. By …

Apartment Building

Cost Segregation study on a $983,000 Apartment Building in Concord, NH

Without a Cost Segregation study, a $983,000 Apartment Building in Concord, NH, purchased in 2019 would have generated a 1st year depreciation of $21,237.66. By …

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How An ETS Cost Segregation Study Won a Client $105 Million in Tax Savings!

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Make U.S. tax law work for you. Self-storage operators can benefit significantly from using cost segregation because of the unique types of construction and exterior …

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