Cost Segregation Study

Cost Segregation Study Overview

Have you recently purchased a commercial or multi-family property? Our team will help you increase cash flow by accelerating depreciation. Cost Segregation Studies can provide opportunities to reduce tax liability and shorten the depreciation time.

By default, a structure on the property will depreciate using the straight-line depreciation method:

Commercial Property Depreciation Equation

Residential Rental Property Depreciation Equation

A cost segregation study will separate the value of the components of a building into shorter class lives: typically, 5-year and 15-year depreciation schedules. These short life components may also qualify for bonus depreciation.

There are many principal elements of a quality Cost Segregation Study. Our studies are intended to adhere to the standards set in the IRS Audit Technique Guide for Cost Segregation and the standards set by the American Society of Cost Segregation Professionals.

As noted in the IRS Audit Technique Guide,

“In general, a study by a construction Engineer is more reliable than one conducted by someone with no engineering or construction background.”

What is a Cost Segregation Study?

The IRS allows a taxpayer to segregate out assets of the commercial real property with shorter class lives to allow a more rapid depreciation of the property. This will typically increase the annual depreciation expense substantially in the near term. An increased annual depreciation expense will result in a reduction in income tax burden.

The purpose of the Cost Segregation Study is to provide a defensible report to classify assets into property classes, explain the rationale and substantiate the cost basis of each asset and reconcile total allocated costs to total actual costs.

Interior of a Building - Cost Segregation Study

Building Facade - Cost Segregation Study

Cost Segregation Scope

All Cost Segregation Studies are performed by professional engineers who gather the necessary information and analyze the property building and components.

Documentation Review

Review documentation, including purchase agreement/contract, closing statements, lease agreements, appraisals, and building/site drawings and plans to the extent available.

Construction Cost Review

As applicable for new construction or renovation projects, we will review actual construction cost information, including invoices, pay applications, bids, and other available actual construction cost information.

Site Inspection

We will complete a site inspection to complete measurements and take-offs to assist in developing cost estimates. During the site inspection, we will also evaluate the condition of the components to conduct an analysis of the physical depreciation of the building components.

Research

We will research appropriate tax court cases, revenue procedures, and other publications by the IRS to develop appropriate class lives for the various building components and site improvements.

Develop Asset Register

We will develop a full asset register for the property. This will include segregated components of the building and site improvements with an appropriate modified accelerated cost recovery system (MACRS) class life assignments. The asset register will include cost estimate adjustments for physical depreciation and a premium/discount for market value. The asset register will also include appropriate indirect costs associated with each component.

Cost Segregation Study Report

We will provide a Cost Segregation Study report which will include the full asset register and a narrative report detailing our methods and reasoning for class life assignments of components.

Cost Segregation Scope

All Cost Segregation Studies are performed by professional engineers who are experts at gathering the necessary information and analyzing the property building and components.

Documentation Review

Review documentation including purchase agreement/contract, closing statements, lease agreements, appraisals and building/site drawings and plans to the extent available.

Construction Cost Review

As applicable for new construction or renovation projects we will review actual construction cost information including invoices, pay applications, bids, and other available actual construction cost information.

Site Inspection

We will complete a site inspection to complete measurements and take-offs to assist in developing cost estimates. During the site inspection, we will also evaluate the condition of the components to complete an analysis of the physical depreciation of the building components.

Research

We will research appropriate tax court cases, revenue procedures and other publications by the IRS to develop appropriate class lives for the various building components and site improvements.

Develop Asset Register

We will develop a full asset register for the property. This will include segregated components of the building and site improvements with an appropriate modified accelerated cost recovery system (MACRS) class life assignments. The asset register will include cost estimate adjustments for physical depreciation and a premium/discount for market value. The asset register will also include appropriate indirect costs associated with each component.

Cost Segregation Study Report

We will provide a Cost Segregation Study report which will include the full asset register and a narrative report detailing our methods and reasoning for class life assignments of components.

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Cost Segregation Study