Cost Segregation Studies

Cost Segregation Studies

The Internal Revenue Service Examiners developed the Audit Technique Guide to assists in the review in cost segregation studies to create a cost segregation for dummies methodology for how it is to be performed. This IRS cost segregation guide helps with the understanding of why cost segregation studies are performed, how to calculate cost segregation, what to examine, and when cost segregation studies are performed. Cost segregation asset classes are used to allocate the property costs between § 1250 property (building or other inherently permanent structure) and § 1245 property (personal property or other tangible property not defined as a building or structural component). There are many court cases that help to define an asset classification, but the most well-known case is the Whiteco Industries, Inc. V. Commissioner. This case established six questions known as the “Whiteco factors” to determine if an asset is inherently permanent. Cost segregation asset classes are now based on the Modified Accelerated Cost Recovery System (MACRS). The segregated building assets are broken out into their correct recovery period defined in the cost segregation depreciation guide to accelerate depreciation deductions. Property components include land, buildings, land improvement, equipment, and furniture and fixtures. An experienced cost segregation professional, like McGuire Sponsel’s Cost Segregation team, can identify these components by creating a cost segregation spreadsheet. A cost segregation spreadsheet is used to allocate the unit costs for all components to be considered in relation to the total basis of the asset or property. The cost segregation template identifies the segregated MACRS asset basis that is then used to calculate the depreciation for Federal income tax purposes. McGuire Sponsel’s Cost Segregation team utilizes an engineering-based approach to correctly identify components that qualify for accelerated deductions based on their experience in the engineering, construction, and architectural fields, as well as their understanding of the tax code.

Cost Segregation Study Example

McGuire Sponsel’s Cost Segregation team can provide a cost segregation real estate example to client’s who are looking to understand the benefit of completing a cost segregation study. A cost segregation study example can be provided on multiple building types including, but not to apartments, warehouses, manufacturing facilities, mixed use buildings, medical office buildings, retail centers, or office buildings. When completing cost segregation analysis real estate, our team utilizes a cost segregation calculator based on a similar cost segregation and bonus depreciation to provide an initial projection to the client for a proposal. Once engaged to complete a cost segregation, our team will reach out to schedule a site inspection. Within that correspondence, the tax consultants will provide a cost segregation example list of pictures and notes that will need to be captured during the site inspection. After completing the site inspection, McGuire Sponsel will take the notes of the property and put them into our cost segregation software. Our cost segregation software will present the system costs into seven divisions. Those divisions include substructure, shell, interiors, services, equipment and furnishings, special construction, and building sitework. These divisions are then broken into subdivisions with descriptions of assets, quantities, unit of measure, and costs per unit or cost per square. Once all building assets are captured, the assets will then be placed into their correct MACRS asset class. The total cost from each asset class then is used to report depreciation for Federal income tax purposes. In addition to the calculations, there is also a cost segregation report. A cost segregation report example will include the findings and overview, a scope of study, information on the team that completed, methods and sources, a property description, tax support, and property photographs. A form 3115 cost segregation study example will need completed on a property purchased in a prior year and will also need a 481(a) calculation. This adjustment is typically reflected on the f3115 as a change number 7.

Is Cost Segregation Worth It

The value proposition for a cost segregation study is relatively straightforward. A cost segregation study will accelerate deductions leading to a time value of money savings. When a taxpayer is debating if a cost segregation is worth it, most providers can run estimates for them. These estimates are typically run through the firms proprietary cost segregation calculator. If a taxpayer is questioning how much does a cost segregation study cost, an estimate run by a cost segregation company can answer that question. Taxpayers may also ask the question “can I do my own cost segregation study”? The answer to that question is typically no. Depreciation law is complicated and requires an understanding of both tax law and construction techniques. When looking at who can perform a cost segregation study it is important to keep this in mind, it is more important to have experience than specific credentials. This is especially important with complicated issues such as filling a form 3115. It is easy to find a form 3115 with a cost segregation study example, but difficult to file the 3115 without experience. This is why experience is critical and when looking for a cost segregation study. Instead of just looking up a cost segregation study near me, calling a reputable firm like McGuire Sponsel is critical. A reputable firm can provide a study that is higher quality, provides bigger benefits, and is more likely to sustain an IRS audit, than looking for the cheapest option. Multiple times we have seen the cheapest option get people into trouble and requires an expert to come in and fix after the fact.

Who Performs Cost Segregation Studies

The IRS audit techniques guide defines a quality cost segregation study as one completed by someone with expertise and experience. They go on to state that no specific requirement or certifications are required, but one done by someone with expertise in both construction techniques and tax law is more reputable than one done by someone without this knowledge. So while the IRS does not put restrictions on who performs cost segregation studies, they are quick to point out that expertise is required from cost segregation companies. They go on to list cost segregation categories, these go from a simple “rule of thumb” approach, all the way to a fully engineered study. When debating how much is a cost segregation study, it is important to note that a quality study will cost more. This is due to the increased cost associated with completing a detailed analysis of the property. A cost segregation real estate example demonstrating this would be a study we did in 2008. In this case the client looked up how much does a cost segregation study cost, and then tried to hire the cheapest provider. This provider got the taxpayer into trouble with the IRS as they were not able to substantiate their work under audit. Not only did they have a study that could not be substantiated, but the study also left money on the table. This is just one reason why it is critical that taxpayers hire quality providers like McGuire Sponsel. Quality firms can provide a better-quality result in a cost-effective manner. In most cases a quality study will yield better results and will be more likely to sustain IRS scrutiny in the event of an audit.

Cost Segregation Rental Property

Investors in rental property are often interested in cost segregation due to the tax savings that this strategy can provide. For an investor with a single property cost segregation on that rental property could lead to significant savings. However, there are many things to consider including passive loss issues and the basis in the property. Cost segregation can maximize bonus depreciation often creating more depreciation than a taxpayer can utilize. Cost segregation takes real estate and maximizes depreciation this can reduce the tax rate significantly. Even considering this cost segregation on real estate can bring large benefits for example, studies often can yield a return of 20 to 30 times the investment in the study. There are many considerations to think about cost segregation on residential real estate can be a great strategy, but how does the irs look at these studies. First is to consider the life of the rental property. A cost segregation study on residential rental property is accepted by the IRS if done correctly. That cost segregation study on residential rental property needs to consider the correct life of the asset. For example, is the building a 27.5-year residential asset, or a short-term rental that would more correctly be classified as 39-year. All this shows that cost segregation for residential rental property is a valuable tax planning strategy. When considering this strategy, it is critical that the taxpayer consider issues such as passive losses, as well as proper treatment of their items. When looking at commercial rental properties considerations for cost segregation are about the same. The passive loss issues are less important for taxpayers that are considered “real estate professionals” by the IRS. Typically this requires that the taxpayer spend 750 hours per year working in real estate. This would be difficult for many taxpayers to meet if they are primarily working in another profession full time.