Cost Segregation Study Example

Cost Segregation Study Example

Cost segregation studies are utilized to create cash flow savings on real estate assets held for investment purposes. While someone can go on the internet and look for a cost segregation study example, they will find very different studies depending on the firm that completed the work. While the IRS does list different cost segregation techniques, including the rule of thumb and residual approaches, a quality firm will complete fully engineered cost segregation studies. While most firms utilize Excel to create these studies, there is no standard cost segregation Excel template. Instead, firms rely on knowledge to recreate detailed analyses. This is a very bespoke process for each building. Once the study is completed, the cost segregation spreadsheet can be utilized to create a depreciation schedule for the taxpayer and then uploaded into their fixed asset software. While this can be a complex process, it must be done correctly to ensure that the cost segregation analysis can withstand audits by the IRS and maximize the savings for the taxpayer. While the IRS does publish an audit techniques guide that details the differing cost segregation methodologies, this stops short of just being a cost segregation depreciation guide, listing useful lives for different assets. It is also important to note that the IRS guide is IRS guidance but cannot be cited as a precedent in front of the IRS. This means that the cost segregation study must rely on revenue rulings, court cases, and other legal guidance. This detailed approach is why cost segregation software has not been created. While multiple companies have tried to create this software, none have come up with a reliable product. The majority of the products that have been created provide poor results that will not withstand IRS scrutiny under audit. 

Cost Segregation Example

Since cost segregation studies can be completed on multiple types of properties, there is no standard cost segregation study example that fits all parameters. Even within the same type of property, the cost segregation studies may vary widely. For example, a cost segregation study on single-family homes will depend on how those homes are rented. A cost segregation study on residential rental property that is held for a long-term rental is very different from a cost segregation example on a short-term rental. The reason that cost segregation on rental property can vary so much is due to the lives of the real property assets. Short-term rentals are considered nonresidential and are given a 39-year life versus the 27.5-year life provided to long-term rentals. While cost segregation on residential rental property to the IRS is an acceptable study, it is critical that the provider knows the difference between the acceptable lives of the assets. Cost segregation can also be performed on other real estate. A cost segregation real estate example could be on a strip mall or warehouse. Also, it is important to understand passive loss limitations; this is why cost segregation for real estate professionals is more valuable.

Cost Segregation For Dummies

Growing up, when I wanted to learn about investing, I would get the Investing for Dummies book. However, as of today, no one has written a Cost Segregation for Dummies book. This is partial since the requirements for cost segregation can be difficult. When people ask, “Can I do my own cost segregation study?” it is important to remind them of the nuances of an analysis. Certain assets can be treated differently depending on how they are being used. Considering when taxpayers question is cost segregation worth it they find that the return on investment is often 10 to 1 or greater, it is often not worth it to try to do one on your own. The question then becomes how much does a cost segregation study cost, and that can be as low as $5,000 or as high as $100,000. The problem with just searching for cost segregation study near me is that you might not find quality providers. These providers may not discuss the disadvantages of cost segregation or even provide a good summary of what is cost segregation on real estate. A quality provider should be able to provide detailed answers to these questions.

Cost Segregation And Bonus Depreciation

Cost segregation and bonus depreciation are symbiotic and tied together in people’s minds. This has not always been the case. Bonus depreciation was started in 2002 as a stimulus for the economy. Since then bonus depreciation IRS guidance has detailed what can be included and what can’t. Bonus deprecation is covered under section 168(k) of the internal revenue code. This details what is eligible for the bonus. There is still confusion with people asking “Are land improvements eligible for bonus depreciation?” and “Can used property use bonus depreciation?”. With bonus depreciation, it is important to look at other issues such as depreciation recapture. Cost segregation and depreciation recapture are important topics as they lead to potential consequences of cost segregation and might require considering putting off the study. Since cost segregation is tied to bonus depreciation, it is important to note that bonus depreciation is temporary. Cost segregation will still be valuable, a cost segregation after bonus depreciation phase-out will still provide significant savings. As with cost segregation, bonus depreciation is a key metric in helping capital-intensive businesses reduce their tax liability. Working with quality cost segregation professionals can help maximize these important tax savings strategies for businesses. 

IRS Cost Segregation Guide

In 2004 we got the first opportunity to review the IRS cost segregation guide. While many see this as a guideline for how to do a cost segregation study, it is in reality a cost segregation audit techniques guide, providing guidance to the IRS as to how to review cost segregation studies under audit. This guidance does not provide a cost segregation report example but does provide guidance as to how the IRS expects to see cost segregation completed. This guidance also provides the IRS opinion as to who can complete cost segregation studies. Under the IRS guidance, there is no recognized cost segregation certification; instead, the IRS states that a cost segregation study should be completed by someone with expertise and experience, adding that someone with experience in both engineering and tax law is best prepared to produce a study. The IRS also does not provide a cost segregation calculator or any rule of thumb estimates as to what should be allocated to different lives. However, they do provide a breakdown of different types of assets and how they should be treated. They also provide more detailed guidance for specific industries such as casinos which provides valuable insight.