Cost Segregation Analysis

Cost Segregation Analysis

Often, we get the question “can i do my own cost segregation study”? Unfortunately, a cost segregation analysis requires a special set of skills as outlined in the IRS Cost Segregation guide. These skills include an understanding of the tax code along with a good understanding of engineering principles. This combination of skills limits who might be able to complete a cost segregation study. Once people realize that they cannot complete the study themselves, the next question will be “how much does a cost segregation study cost”? This will depend on the firm completing the study. While some may look for a local provider thinking that a cost segregation study completed by a firm near me is better than one done elsewhere, most of the quality firms work on a national basis. There are national firms such as McGuire Sponsel and KBKG Cost Segregation that are well known in the industry. These providers will often provide a free estimate if the client asks the question “is a cost segregation worth it”? Typically the answer to this question is yes, if the value of the property is large enough.

Cost Segregation Bonus Depreciation

In recent years bonus depreciation has made cost segregation more valuable. Cost Segregation and bonus depreciation go hand in hand. A cost segregation study maximizes the amount of a property eligible to be claimed as tangible personal property and land improvements. This then allows the taxpayer to claim bonus depreciation on these assets. Cost segregation studies will still be valuable as bonus deprecation begins to phase out starting in 2023. Starting in 2023 bonus depreciation will phase down by 20% per year. In order to understand how this works it is good to know some of the history around cost segregation and bonus depreciation. Bonus depreciation was first recognized by the IRS after 9/11. At the time bonus depreciation was only for new assets. After the Tax Cuts and Jobs Act of 2017 bonus depreciation was also allowed on used property. Bonus depreciation can be taken on all assets with a life of 20 years or less. This means the answer to the question are land improvements eligible for bonus depreciation is yes. Taxpayers do need to keep in mind that completing a cost segregation to maximize bonus depreciation can cause some recapture issues. Cost segregation recognizes items as 1245 property which means concerns over cost segregation and depreciation recapture are legitimate. There are ways to mitigate this concern, but it is something taxpayers need to be aware of when maximizing depreciation through a cost segregation study. These are just some of the ways cost segregation and bonus depreciation interact. Taxpayers can elect out of bonus depreciation if they desire to slow down depreciation deductions, but this is a rarely utilized strategy.

Cost Segregation Example

Cost segregation can be completed on many types of properties. Depending on the type of property different considerations must be made. For example when completing a cost segregation for rental property a taxpayer should consider the implications of passive losses as well as the income being created. Other cost segregation examples could include cost segregation studies for single family homes. Studies can be done on single family homes but it is important to know if the single family home is used as a vacation rental or as a long term rental. Some firms have attempted to automate this process, such as when kbkg created a residential cost segregation program. This program would create a cost segregation report, however it would be important for taxpayers to see a cost segregation report example generated by this program before moving forward. In general a cost segregation study completed by a program would not be reliable, and in most cases would not withstand audit. Cost segregation analysis can be completed on multiple types of real estate. This could include warehouses, car dealerships, medical buildings among others. As mentioned above when a cost segregation study is completed on residential rental property it is important to determine if the asset is rented out short or long durations as this will determine if it is considered residential rental property or non-residential property. Cost segregation is a term of art, this means different people may have different answers when determining what is cost segregation as it relates to real estate. In order to maintain quality sometimes people will ask for a cost segregation report example. McGuire Sponsel will happily walk anyone through our reports, or the reports of our competitors.

Cost Segregation Calculator

Many people want to see a quick cost segregation calculator that can tell them what a cost segregation study might reclassify or save them if they were to do a study. Typically the best way to do this is to reach out to the cost segregation provider to have them run a cost segregation estimate. Often that provider will also be willing to provide a cost segregation study example. This example can be used to help the taxpayer understand what to expect when reviewing their cost segregation study. Each firm completing a cost segregation study uses their own cost segregation software. While there are companies that have tried to develop their own software this is often not customizable enough to be reliable in practice. While the calculations may look simple and many people might wonder why there is not a cost segregation excel template, the tax law that goes into the process is complex. Cost segregation professionals need to have vast knowledge of the court cases involved in determining when an asset should be considered real or personal property. The process behind cost segregation techniques is learned over time. Creating a cost segregation depreciation guide is next to impossible. Simply understanding when an air conditioning system is personal requires an analysis of how the item is utilized, where it is installed and many other factors. This could be why no one has ever published the book cost segregation for dummies. It is important that the simplicity of the subject does not cause people to think the analysis is simple. Therefore firms like McGuire Sponsel work so hard to create quality cost segregation studies.