Many different case scenarios can utilize cost segregation studies. Taxpayers who own properties, purchase existing properties, and construct new properties can all benefit from the tax laws that allow cost allocations. Typically, properties that are purchased, expanded, remodeled, or constructed after 1987 when the Investment Tax Credit was enacted will benefit from a cost segregation analysis.
TYPES OF COST SEGREGATION STUDIES
The highest yielding deductions and credits often come from properties valued at over $200,000 or that have large amounts of added features such as high-end finishes or components to operate. The type of clients who seek cost segregation studies often include:
- Business owners of large manufacturing plants, hotels, restaurants, shopping centers or food facilities.
- Individuals that own large portfolios of investment properties such as multi-family homes or apartment buildings.
- Real estate companies that are often purchasing and selling multiple properties within the calendar year.
- Franchise owners with similar properties such a golf courses or assisted living facilities.
Depending on the type of property, the percentage rate of the building’s cost that can be classified into shorter life assets. This will vary but is generally 15 to 45 percent. Properties with more land have higher benefits of tax due to the personal property that can be allocated.
Some business examples include:
- Grocery stores with a lot of machinery inside
- Hospitals and medical clinics with labs and technical machinery
- Industrial manufacturing facilities with advanced equipment;
- Theme parks with new land and ride constructions in mind
- Shopping centers with large parking areas and rainwater drainage systems
- Apartment buildings in suburban areas with large area for tenants to park, swimming pools on property, tennis courts, and golf courses
Case Study Example
Engineered Tax Services performed a cost segregation engineering review of building components and site improvements on 21 two-story buildings situated on 8 acres in Dallas, Texas. The cost segregation benefit included a reclassification of 27.5-year depreciation class life assets into 5 and 15-year class lives, resulting in a combined benefit of $1,835,135 on the purchase. This benefit clearly demonstrates why cost segregation has become a powerful tax tool for real estate clients as a result of the final tangible property regulations (T-Regs).
Generally, an engineered cost segregation study will be required for any large sum of costs being allocated for a depreciation deduction. Once the property owner decides their current or future property is in need of a study, a specialist will generally provide an estimate from the proposal. If the property has very specialized assets or building components in place, an outside consultant may be needed for their expertise in that specific area.
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