Tax Planning for Property Owners

The Value of a Cost Segregation Study

What is a cost segregation study? 

A cost segregation study is an analysis performed by tax and engineering professionals to identify and reclassify certain components of a building that can be depreciated over a shorter period than the building itself. This can lead to significant tax savings for property owners. 

How do cost segregation studies work? 

In a cost segregation study, experts analyze the various components of a building, such as electrical, plumbing, and HVAC systems, to determine if they can be depreciated over a shorter period, typically 5, 7, or 15 years, rather than the standard 27.5 or 39 years for residential and commercial properties, respectively. 

Who can benefit from a cost segregation study? 

Property owners who have recently purchased, constructed, or renovated a commercial or investment property can benefit from a cost segregation study. This includes owners of office buildings, retail spaces, warehouses, and multifamily properties. 

What are the potential tax savings from a cost segregation study? 

By accelerating the depreciation of certain building components, a cost segregation study can significantly reduce the amount of taxable income for property owners, resulting in substantial tax savings. The exact amount of savings depends on factors such as the property's cost, the owner's tax bracket, and the depreciation method used. 

How long does it take to complete a cost segregation study? 

The time it takes to complete a cost segregation study depends on the size and complexity of the property, as well as the availability of documentation. On average, a study can take anywhere from a few weeks to a few months to complete. 

Is a cost segregation study worth the cost? 

The cost of a cost segregation study varies depending on the size and complexity of the property. However, the potential tax savings can nearly always outweigh the cost of the study, making it a worthwhile investment for many property owners. 

Can a cost segregation study be performed on an existing property? 

Yes, a cost segregation study can be performed on an existing property. In fact, many property owners choose to perform a study after purchasing or renovating a property to maximize their tax savings. 

Are there any risks associated with a cost segregation study? 

While cost segregation studies can provide significant tax savings, they also come with some risks. The IRS may audit properties that have undergone a cost segregation study, so it's important to work with a reputable firm that follows IRS guidelines and provides a defensible study. 

How do I choose a firm to perform a cost segregation study? 

When choosing a firm to perform a cost segregation study, look for one with experience in your industry and a strong track record of successful studies. The firm should have a team of qualified tax and engineering professionals and be able to provide references from satisfied clients.

How can I get started with a cost segregation study? 

To get started with a cost segregation study, contact a reputable firm and provide them with information about your property, such as purchase or construction documents, blueprints, and depreciation schedules. The firm will then conduct a feasibility analysis to determine if a cost segregation study is likely to benefit you and provide an estimate of the potential tax savings. 

Do I have to amend my tax return to take advantage of cost segregation if my buildings are already depreciating? 

No, you do not have to amend your tax return if you want to do a cost segregation study on buildings you own that have been depreciating for several years. Instead, you can report cost segregation using IRS Form 3115, Application for Change in Accounting Method, to claim accelerated depreciation from the cost segregation study on your tax return. This form allows for a change in accounting method without the need to file an amended return for previous years. 

For more information on cost segregation studies or other tax strategies that may benefit your commercial or residential rental property, please reach out. We are always happy to chat with new and current connections, schedule a commitment-free meeting today.