“When it comes to real estate acquisitions, the jewel of cost segregation is that it yields enhanced depreciation deductions…there can be astounding differences in outcomes between using and not using it.”
– AICPA Journal of Accountancy, Cost Segregation Applied
Real estate property owners can benefit significantly from specialized asset segregation. Unfortunately, the majority of property owners have not taken advantage of these benefits, which generally fall into four categories:
Income tax decreases in the early years of property ownership by enabling depreciation expense to be taken sooner.
Property tax decreases by reallocating asset values from taxable real estate to non-taxable personal property[i].
Condemnation award increases by capturing the value of hidden or missed assets and reclassifying such assets to categories that yield higher awards and move reimbursements.
Depreciation deduction accuracy and consistency for financial reporting purposes.
Four definitions provide a basis for understanding asset segregation:
“Cost Segregation” is a process that: 1) identifies discrete assets that are often missed or hidden and 2) accurately quantifies and segregates such assets’ costs for income tax and/or financial reporting depreciation purposes. Generally, the methodology produces significant tax benefits by identifying tangible personal property assets, which taxpayers can elect to depreciate faster than a building and its components. The resulting reallocated personal property costs often include a share of the building’s heating, air conditioning, plumbing and electrical systems costs.
“Property Tax Asset Value Segregation” is a real estate tax related methodology that segregates a subject property’s overall market value into discrete asset values that are either taxable (generally real estate) or non-taxable (generally personal property). This process usually yields significant property tax benefits because owners, appraisers and assessors often underestimate the extent of the personal property value associated with a building.
“Condemnation Asset Value Segregation” is a condemnation related methodology that identifies and segregates discrete asset values attributable to real estate, fixtures and personal property. A comprehensive identification of all fixtures and personal property usually enhances the total of condemnation asset value awards and also the amount of relocation benefits.
“Asset Segregation Study” is an analysis of building and building-related property that identifies discrete assets and allocates appropriate direct, indirect and multi-purpose costs or values to such discrete assets for various purposes including income tax, property taxes, condemnation awards, financial reporting, etc.
Note that all three methodologies identify assets but allocate different asset value types: income tax and/or book cost, state law property tax market value and state law condemnation fair market value.
Facility Cost Segregation Tax Benefit Situations that significantly increase cash flows for property owners include:
Inherited Real Estate
New Construction
Purchase Price Allocations
Real Estate Acquisition
Section 754 Basis Step-Up
Section 1031 Exchanges
Tenant and Leasehold Improvements
How is the significant present value tax benefit achieved? Commercial real estate generally qualifies for 39-year life cost recovery (depreciation). However, most buildings do have special 3, 5, 7, and 15 year assets, the costs of which can be “segregated” or isolated from the building itself. By identifying such special assets and segregating the related costs from the building, the resulting acceleration of depreciation deductions creates significant income tax present value benefits.
To qualify for this special tax opportunity, the Internal Revenue Service requires an “independent” engineering based cost segregation analysis that identifies these assets and their costs. We have the necessary financial accounting, tax, engineering and real estate valuation experience and credentials to provide the most cost effective outcome for you, including the issuance of a qualifying report for the IRS and your tax accountant.