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The Value of a Cost Segregation Study and When Not to Get One

Admin-Veritax

March 2, 2023

***This is part 2 of a two part series addressing some common questions
About cost segregation as a tax strategy. Part one can be found here

As mentioned in part one of this two part series, cost segregation is a very niche and complex strategy. Using a cost segregation study to accelerate depreciation and offset your tax liability (either partially or completely) is a powerful strategy. For many property owners, investing in a study provides great benefit – but this isn’t true for everyone. Cost segregation is not a one size fits all solution, and it doesn’t make sense for every situation.

The first step is to have a discussion with a reputable professional to determine if your property qualifies. Following that conversation, you should consider the cost of a study in comparison to the proposed benefit. You need to take a number of details into account when making your decision. Below we will explore the cost structure, property details, and overall value of cost segregation. We will also explore when it is not in your best interest to conduct a cost segregation study.

What is the cost / cost structure?
One of the most commonly asked questions about cost segregation studies is about the associated cost or fee structure. The cost of a cost segregation study depends on several factors. The amount of work involved to produce the result is the primary factor.

Cost segregation studies are typically quoted as a flat fee, and may include additional site inspection fees to offset the cost of travel and time to inspect the building.

Studies for single-family homes average $3,000, while the cost of larger properties, such as shopping malls or hotels can be as high as $15,000.

Is it worth it?

Whether a cost segregation study is worth it depends on your specific situation and goals. Here are some factors to consider:

  • Size of the building: cost segregation studies are generally more cost-effective for larger buildings, as the potential tax savings are greater.
  • Age of the building: newer buildings generally have a higher value in their land and structural components, which may result in a lower potential tax savings from cost segregation.
  • Tax rate: a higher tax rate generally means that the potential tax savings from cost segregation will be greater.
  • Holding period: If you plan to hold the property for a short period of time, the benefits of cost segregation may be reduced or eliminated by the potential for recapture.
  • Cash flow needs: if you need to increase your cash flow, cost segregation may be a good option to reduce your tax liability and increase your available funds.
  • Cost of the study: the cost of the cost segregation study can be a significant upfront expense, and you should weigh the potential tax savings against the cost of the study.

In general, if you have a large building with a high tax rate, and you plan to hold the property for a long period of time, cost segregation may be worth considering. It is important to work with a qualified professional to determine if cost segregation is the right strategy for your specific situation and to ensure compliance with all rules and regulations.

When not to do a cost segregation study?

Naturally, our focus is on the benefits of this tax strategy. That being said, we understand that it isn’t a silver bullet solution and not everyone will benefit equally. As a reminder, outlined below are some of the drawbacks to cost segregation. When deciding if a cost segregation study is right for your property, consider the risk against the reward and always be sure to consult with a reputable professional.

  • Higher upfront cost: the cost of performing a cost segregation study can be high, which can be a barrier for some building owners and businesses.
  • Potential for increased audit risk: if the cost segregation study is not performed correctly, it can increase the risk of an audit by the IRS.
  • Complex rules and regulations: the rules and regulations surrounding cost segregation can be complex, and it is important to work with a qualified professional to ensure compliance.
  • Potential for recapture: if the building is sold before the end of its useful life, the accelerated depreciation taken through cost segregation may be subject to recapture, resulting in a tax liability.

Conclusion
While we believe that cost segregation is undoubtedly one of the best tax strategies available to property owners, we also understand it’s not for everyone. Our goal is to increase awareness and education, exposing property owners to any potential savings they may be overlooking. Our team is willing and available to answer any questions you may have and we are happy to provide you with a no cost estimate. Reach out to your CPA or a trusted advisor if you think you qualify.

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