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Recent IRS rulings and procedures, coupled with a landmark court case, have made it possible to realize substantial tax savings associated with the depreciation of real property. If you own developed real estate valued at $1 million or more, you may be in a position to realize significant tax savings and an increase in cash flow through a cost segregation study.

How Much Can You Save? On average, we're able to accelerate 30% of a building's cost into shorter lives.

Cost Segregation - What is it?

Taxpayers who own residential rental property and/or nonresidential real property are entitled to separately depreciate building components that qualify as tangible personal property including certain leasehold improvements made by the lessor or lessee. In addition, land improvements related to the building, such as parking lots, curbs and sidewalks may be separately depreciated. The identification and separate depreciation of personal property components of a building and related land improvements is referred to as cost segregation.

Cost segregation can generate significant tax savings. Personal property components that are mistakenly included in the basis of a building are recovered through depreciation deduction using the straight-line method over 27.5 years for residential rental property and over 39 years for nonresidential real property. Building components, including leasehold improvements that are separately depreciated as personal property are usually recovered over a five (5) year or seven (7) year period using the 200 percent declining balance method. Related land improvements are recovered over a 15-year period using the 150 percent declining balance method. Under current tax law, the personal property components and related land improvements may, in limited circumstances, qualify for a first-year depreciation deduction up to 50% of the cost.

Cost segregation is not limited to newly constructed or purchased property. Under current IRS revenue procedures, a taxpayer who placed residential or nonresidential real property in service after 1986, without allocating any costs to personal property, can receive permission to change its accounting method and claim a deduction for all the depreciation that should have been claimed in prior years in the year that the change in accounting method is elected.

Henry & Horne has the necessary expertise to conduct a cost segregation study that is acceptable to the IRS. We apply our tax expertise and work with construction, engineering and other specialists to thoroughly analyze the cost components of a building to determine which building components can be classified to a shorter recovery period. Detailed work papers and analyses, absolutely essential for the IRS, are provided for all Henry & Horne Cost Segregation Studies.

Cost Segregation - How does it work?

The cost segregation study process is relatively straightforward. First, we compile basic building information, i.e., cost, date placed in service, square footage, etc. From this information, we perform a free feasibility study to determine if a cost segregation study will provide sufficient economic benefit. Once a determination has been made, an engagement letter and cost segregation questionnaire are prepared and additional information is obtained, i.e., construction drawings, AIA documents, change orders, settlement statements, prior depreciation schedules, etc. Our construction engineer conducts a site visit and takes photographs to document his findings. All gathered information is analyzed and then summarized in our Cost Segregation Report. In addition to the final results, our report includes graphs, charts and revised depreciation schedules. If required, we will prepare Form 3115 Application for Change in Accounting Method.

The benefits of a cost segregation study can be easily attained. We make the extra effort to have the cost segregation process go as smoothly as possible and minimize your inconvenience.