Why do I want a cost segregation study?

Your Guide to State, Local, Federal, Estate + International Taxation

Utilizing your real estate is a great way to accelerate tax depreciation expense to offset taxable income, and the method used to determine the tax deductions from the real estate is called a Cost Segregation Study. So what is it and why do you want one?

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What a Cost Segregation Study does

  • Analyzes commercial or residential real estate (39 or 27.5-year assets) to
  • Identify the Land Improvements and personal property (15, 7, and 5-year assets) to be
  • Reclassified to shorter year tax lives which
  • Accelerates tax depreciation expense thereby
  • Reducing taxable income and the resulting tax liability

A Cost Segregation Study applies to anyone who expects to pay federal or state income tax.

If fixed assets were recorded in a previous tax year, an analysis can be performed on those assets to recalculate and bring forward, or “catch up”, the tax depreciation with a 481(a) deduction that is reported on a Form 3115, automatic change in accounting method, that does not require an amended tax return.

Benefits of a Cost Segregation Study

  • Acceleration of tax deduction in earlier years provides positive time value of money
  • Immediately improves cash flow
  • Provides a detail fixed asset listing for efficient asset management and ease of future disposals
  • Reconciles construction in progress accounts and confirms accuracy of contractor payments
  • Tax benefits received by a taxpayer are far greater than the cost of the study
  • Very safe in the view of the IRS

Performing a cost segregation study on real estate is a very efficient and cost-effective way to obtain the additional tax deductions that are needed by todays’ taxpayers. If you have any questions, contact your Henry+Horne advisor.

Ty M. Riley, CPA