When to Get a Cost Segregation Study

Cost Segregation Studies: When to get one, where to get one, and why to get one.

A cost segregation study is most beneficial when you've recently purchased, constructed, or significantly renovated a commercial or investment property. Here are key scenarios where a cost segregation study can be advantageous: 

• New Property Acquisition: If you've bought a property within the last 15 years, particularly if it's a high-value asset, a cost segregation study can help you accelerate depreciation deductions. The optimum time is in the year of purchase or construction to maximize immediate tax benefits. 

• Major Renovations or Expansions: If you've recently completed substantial improvements to your property, a study can segregate these costs for quicker write-offs. 

• Look-back Studies: Even if several years have passed since the property was acquired, you might still benefit from a "look-back" study. This allows you to adjust previous depreciation deductions without amending past tax returns, catching up on the accelerated depreciation for the current tax year. 

• Holding Period: If you plan to hold the property for at least three to five years, the benefits of accelerated depreciation typically outweigh the costs, though this can vary based on your overall tax strategy and future plans for the property. 

Where to Get a Cost Segregation Study 
Finding a qualified service provider for a cost segregation study is crucial for ensuring accuracy and defensibility in case of an IRS audit: 

• Specialized Firms: Companies like Veritax Advisors and other specialty tax firms provide expert services in cost segregation. These firms often include engineers and tax professionals who understand both the construction and tax implications. 

• Accounting Firms: Some larger accounting firms or those with a specific real estate practice might offer cost segregation services or can refer you to specialists. 

• Cost Segregation Consultants: Look for consultants with certifications like Certified Cost Segregation Professional (CCSP) or equivalent experience for added assurance of expertise. 

 Why Get a Cost Segregation Study: The Cost-Benefit Analysis 
The primary reason for undergoing a cost segregation study is to enhance your cash flow through tax savings: 

• Accelerated Depreciation: Instead of a standard 27.5 or 39-year depreciation schedule for residential or commercial properties, respectively, cost segregation can reclassify certain assets to 5, 7, or 15-year depreciation schedules, significantly reducing current tax liability. 

• Increased Cash Flow: By accelerating depreciation, you reduce taxable income, leading to less tax paid in the short term, which can be reinvested or used for other financial strategies. 

• Bonus Depreciation: With the Tax Cuts and Jobs Act allowing for bonus depreciation, properties placed in service in recent years can write off a larger portion of costs immediately, magnifying the benefits of a cost segregation study. 

• Return on Investment (ROI): The cost of a study can range from $5,000 to $20,000, but the potential tax benefits can be significantly higher, often with an ROI of 25 to 1 or even more, depending on the property's value and the study's findings. 

• Depreciation Recapture: While there's a risk of increased tax upon selling the property due to recapture of accelerated depreciation, the benefits from cash flow improvements often outweigh this downside, especially if the property is held for a reasonable period. 

• Audit Defense: A professionally conducted study provides detailed documentation that can stand up to IRS scrutiny, reducing audit risk by ensuring compliance with tax laws. 

 In Conclusion 
Cost segregation studies are a strategic tax planning tool that can offer significant financial benefits to real estate investors and property owners. By understanding when to implement one, where to seek expert services, and why they're beneficial, you can make informed decisions that could lead to substantial tax savings and improved cash flow. Remember, the key is in the strategic timing, professional execution, and consideration of your long-term investment strategy. 

For more information on when and why to invest in a cost segregation study,  reach out to one of our experts. We would be happy to discuss a custom solution for your unique needs.