Understanding Cost Segregation

Tax Professionals' Resource
April 12, 2013 — 1,285 views  
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With the increasing value for real estates, a lot of your clients have started investing in all sorts of property. Not only do they look for the best investment options, but they are also updated with all methods to reduce tax. Cost segregation is what the government has to offer to cut down on tax.

If your client is buying, building, expanding, or remodeling any real estate property, suggest him to conduct a cost segregation study. Cost segregation is the process through which you identify personal property assets and land improvement costs that have been grouped with the real estate property. For example, you will have to identify all their FF&E (furniture, fixture, and equipment) whose value depreciates in 5 or 7 years. You will have to analyze and divide the assets that will depreciate in the next 5, 7, and 15 years from the main building whose depreciation value will be calculated only after 27 ½ or 39 years. By doing so, you will be helping your client to speed up their depreciation deductions and thereby, pay less tax on their assets and improve their cash flow.

Benefits of Cost Segregation

By getting a cost segregation analysis conducted on your client’s asset, you will be able to save a lot of their tax money. As the lifespan of a property reduces, the depreciation value increases, meaning the value of the asset will reduce. You will save money on tax and give increased access to cash which can be used for other investment prospects or other needs.

Earlier, a four year period was provided to claim all retroactive savings on acquired property. But that rule has been amended in1996 giving you the opportunity to catch up on all the backdated savings on property bought since 1987. This is another prospect to increase your client’s cash flow.

They will also have a clear documentation of all cost and assets. This will help them to resolve any IRS enquiries with access to a proper audit record.

Eligibility for Cost Segregation

Anybody who has any constructed structure for business or rental needs is eligible to claim the gains of cost segregation. Shopping malls, resorts, health care centers, industrial buildings, sports centers, and other such places are all eligible to claim the benefits.

To put it more simply, all taxpayers who have bought, built, renovated, or expanded any property since 1987, and those who own property with a depreciation value of $75,000 or more are eligible for cost segregation. Even lessors and lessees who have modified or improved the property for $75,000 or more and owners who have recently sold their property can also gain from cost segregation.

Best Time for Cost Segregation Study

The best time for a cost segregation study will depend on your client’s current situation. It can be done any time after a property has been bought, built, or remodeled due to the catch up period. But it would be ideal if the study is done within the year itself as they will be able to save up on their taxes and get all their assets classified even before the building starts to depreciate. If your client is still planning the construction or remodeling project, they can also get the study done simultaneously as they will be able to identify all the items that will qualify for depreciation, which in turn will save them money and time.

Tax Professionals' Resource