The CPA vs. The Cost Segregation StudyJanuary 15, 2008 — 2,266 views
Many if not most tax advisors are reluctant to perform cost segregation studies. With new technology however, the tax benefits of such studies far outweigh the obstacles to completion - even for clients who own smaller investment properties.
In brief, cost segregation studies separate personal property and land improvements that depreciate in five and 15 years from real property that depreciates, in the case of residential rental property, in 27.5 years. Seeking out faster write-offs through cost segregation results in greater cash flow, since the payment of federal and state income taxes is deferred. Cost segregation studies also let taxpayers write off obsolete components and can even lower local realty-transfer taxes.
Example of First Year* Savings Before and After Cost Segregation Study
· bought Rental Property in 2005 for $260,000 (one unit)
· land value $84,000
· is in 40% tax bracket
All property classed as real property. Straight-line depreciation method is used.
· $20,000 worth of personal property identified and depreciated over five years using a 200% declining balance method.
· $24,000 worth of land improvements identified and depreciated over 15 years using a 150% declining balance method.
5 and 15 years
First Year Tax Savings
*For illustrative purposes first year only is shown although increased savings continue for 15 years.
Despite the obvious benefits of cost segregation, three major issues prevent the typical CPA from performing these studies in service of the average residential rental property-owning taxpayer.
Price, Time and Expertise
With price tags now ranging from $10,000 to $25,000, cost segregation studies are out of the reach of owners of smaller residential rental properties. Further, the studies are time-intensive for the CPA, requiring site inspections and extensive building cost research. Finally, the vast majority of CPAs do not believe they possess adequate construction and/or engineering expertise to evaluate and classify a building’s structure and components. The result has been that only the larger accounting firms, in partnership with construction, architecture and engineering companies, have been able to share with their wealthiest clients the significant benefits of cost segregation.
Until recently, CPAs were faced with the following options in light of these obstacles: partnering with engineers, attempting to master building cost data themselves or most often, refusing cost segregation study work entirely. Only in the last few years has a fourth and preferable option emerged: new, online technology that makes cost segregation studies both doable and affordable.
The Web to the Rescue
Now in their infancy, the few online cost segregation programs that exist have been built on the promise to save the tax advisor time by automatically classifying depreciation categories. In the case of Marshall & Swift’s TaxSeg Express, the advantages go further, since TaxSeg Express matches component checklists with continuously updated, verifiable building cost data that the IRS cost guide itself , thus producing accurate component values and eliminating the need for engineering experts*.
As of this writing, automated cost segregation programs are few and far between and to date, only CPAs with extensive real estate knowledge seem to have grasped the potential these programs have for making cost segregation studies available to their entire client base.
The CPA misses an important opportunity to gain the business of the many local taxpayers who own rental income properties when he or she chooses not to undertake cost segregation studies. Now that affordable, online technology is making cost segregation easy to perform, CPAs must no longer ask themselves if they have what it takes to perform such studies. Instead, CPAs must now ask themselves this question: "Would my clients rather have money now or money in 27 years?"
*Marshall & Swift stresses that its program is a calculating engine only, and that all tax analysis is the responsibility of the tax professional.
Marshall & Swift
915 Wilshire Blvd., 8th floor
Los Angeles, CA 90017
Marshall & Swift