Total costLandDepreciable basis????????
$6,650,000$1,277,500$5,372,500Annual depreciation (using 39-year straight line) $137,756Accurate Cost Allocation and Depreciation after Cost Segregation Study
Land5-year property7-year property15-year property39-year property????????
Year 1 depreciation with cost segregation
Less annual depreciation without cost segregationAdditional year 1 depreciation
Year 1 tax savings based upon 35% marginal tax rate
$30,362Who Benefits from a Cost Segregation StudyIf you own real estate and pay federal income taxes or expect to during the ownership period for the property, you will benefit from the results of a cost segregation study. This is true whether the owner of the real estate is a corporation, limited partnership or limited liability corporation. For syndicators, a cost segregation study is appropriate if limited partners will receive material net taxable income during the holding period even if the general partner does not currently pay federal income taxes. The cost segregation study will increase depreciation shield, thereby decreasing and deferring federal income taxes for the investors.Decreasing and Deferring Federal TaxesSince a cost segregation study decreases and defers federal income taxes, let's review the long-term impact of this deferral. When the property is sold, capital gains tax will be due if the owner does not enter into a 1031 exchange. However, capital gains tax rates are typically 15% for high net worth individuals, while the ordinary income tax rate is 35%. In addition, the deferral during the ownership period has material benefits because of the time value of money. All investors would much rather pay a 15% tax rate when an asset is sold as opposed to paying a 35% tax rate today.When Should You Obtain A Cost Segregation StudyThe best time to obtain a cost segregation study is when you build or purchase a property. Documentation is most readily available for performing a study and a contemporaneous property inspection can be performed to best document results. However, there are options to perform a cost segregation study for property which has been developed or purchased previously.Elements of Preparing a Cost Segregation StudyThe appraiser starts by gathering documents from the property owner and performing a site visit. As necessary, depending on the special-use property found during the site visit, the appraiser would confer with tax counsel and review relevant tax court decisions. For newly constructed properties, most of the information on actual costs can be obtained from construction draws or invoices from contractors. For existing properties, the appraiser performs a quantity take-off for 5-year, 7-year, and 15-year property and estimates replacement cost using recognized sources. The appraiser then values land, 5-year, 7- year, 15-year, 27.5-year and 39-year property based upon inspection, analysis and IRS regulations and court rulings.Does this only apply to large owners?Both large and small owners of income property or owner-occupied commercial property can benefit from a cost segregation study. Commercial properties with a cost basis of at least $200,000 will likely see a material benefit in excess of the cost from a cost segregation study. In fact, owners of single-family rental homes can probably achieve worthwhile benefits by obtaining a cost segregation study.Qualifications to Consider when ordering a Cost Segregation ReportThe ability to value land and real property are critical elements when engaging a tax reduction expert to perform a cost segregation study. In addition, it is essential they have a detailed understanding of rules for classifying 5-year, 7-year, 15-year, 27.5-year and 39-year property. The ability to justifiably increase short-life depreciation materially increases the benefits of a cost segregation study. While most accounting professionals have a rudimentary understanding of the 5-year, 7-year and 15-year property classifications, few have a detailed understanding of this highly specialized niche. Be certain the report provider has scrutinized both the federal income tax code and the meaningful tax court cases to allow you to maximize your depreciation and minimize your federal income tax liability.