Whether you are a business owner, commercial property owner or an investor, cost segregation studies are critical to uncovering potential tax savings that can increase your cash flow. This federal income tax tool can seem complicated, but if you work with an experienced cost segregation expert, you will be able to accurately identify components of your building that can be classified for faster depreciation. It may be helpful to understand what is needed for the study.
The IRS requires many steps in the cost segregation process, each of which will help determine whether you can reallocate assets and qualify for these tax benefits. However, it is the first step – the collection of information for the study – that is perhaps the most crucial step. The initial information request allows the cost segregation specialists and engineers to generate an estimate of the benefits a study may yield. It will also determine the cost, scope and projected timeline of the cost segregation study.
General Project Information
The type of information will vary depending on whether the property already exists or will be constructed in the future. For the first meeting before a cost segregation project begins, you can expect the following general information to be collected:
- Project and entity description
- Purpose of the building
- Placed-in-service dates
- Square footage
- Rent roll (if multi-tenant)
- Tax information for previous years (if applicable)
- Current or future construction plans
- Property maps
For new construction or improved cost segregation projects, your cost segregation specialist will want more specific information including:
- Property settlement statement
- Purchase/lease agreements or appraisals
- Land and property size
- Thorough list of projected costs, including land development costs
- Contracts, construction schedules, payment requests and payments
- Schedules, change orders or documents for future renovation plans
- Blueprints of prospect project
- Property maps
- Relevant photographs of work in progress or completed assets
- Final AIA
- Cost incurred outside AIA
- Certificate of Occupancy
- Applicable site inspections (past site inspections and photographs)
- Applicable county documents that will assist in calculating land and real property book value
- Detailed accounting of interior finishes
- Records of equipment purchased or involved
- Any previous purchase price allocations that separate each asset into the appropriate category and value
- Documentation that records or proves deterioration and/or removal of preexisting assets
The IRS defines a quality cost segregation study as “a study that is both accurate and well-documented in the process of classifying, explaining the rationale, and substantiating the cost basis of each asset while reconciling total allocated costs to total actual costs.”
Purchase and Acquisition Cost Segregation Information
In addition to the information listed above, your cost segregation specialist will need the following information related to purchase and acquisition costs:
- Purchaser’s settlement statement
- Most recent fixed asset and depreciation schedule
- Land value allocation
- Recent appraisal
- All available construction drawings or floor plans
- Site survey/Site utility drawing
- Property rent roll as of the date of acquisition or apartment mix
- If purchased through a 1031 Exchange, the adjusted basis as reported on Form 8824, Line 25
While these lists may seem daunting, your cost segregation expert will guide you through each step. Most cost segregation specialists have an organized plan in collecting and analyzing information. The more information you can provide, the more we can help you maximize the technical accuracy of your study. While all properties and cases are different, you can expect a cost segregation study to take between 4-6 weeks to ensure a high-quality study.
Don’t pass on the opportunity to increase your cash flow. The engineering and tax professionals on the cost segregation team at Engineered Tax Services have helped real estate owners and investors significantly increase their cash flow by identifying and reclassifying assets of their building for faster depreciation.
Our team of engineers, CPAs and cost segregation experts will guide you through the process and provide you with the most updated information on accounting rules and tax updates. Our goal is to ensure you’re on track and utilizing this strategic tax tool for real estate.
Request a free benefit analysis to identify an estimated benefit and ensure a cost segregation study makes sense for your property.
To learn more about cost segregation studies for real estate owners and investors, call Engineered Tax Services at (800) 236-6519 or visit our cost segregation page for more information.