Cost Segregation

What is Cost Segregation?

Cost segregation reclassifies assets to maximize personal property, optimizes depreciation deductions, and results in substantial cash flow benefits. If you have acquired business properties through purchase, new construction, renovation or leasehold improvements, you may benefit from cost segregation. Any property held for a business purpose is subject to depreciation and may benefit from a review. This includes both new and existing properties. Taking higher deductions now, instead of the future, allow you to receive an interest free loan to invest as you see fit.

When acquiring, renovating or building real estate most taxpayers tend to overstate the amount of 39-year real property. This limits the depreciation deductions available to a taxpayer in the early years of their investment. A cost segregation solves this problem by reclassifying assets by maximizing the property eligible for treatment as 5, 7 or 15 year property. This depreciation optimization results in substantial cash flow increases. A study on an existing property can yield a higher immediate benefit because a “catch-up” on missed depreciation is allowed by calculating a Section 481(a) adjustment. This is permitted once a qualified cost segregation study has been performed and a Form 3115 has been filed for the change in accounting method. A qualified cost segregation study requires an understanding of the complexities of the tax code and of the materials and methods of construction design.

McGuire Sponsel’s unique approach to cost segregation employs civil, structural and architectural engineering knowledge coupled with tax law experience to identify components that qualify for accelerated depreciation. All actual and estimated asset costs, along with their classifications, are then documented to withstand IRS scrutiny. The IRS sees cost segregation as a legitimate method for determining the useful life of building components.

What makes a Great Prospect?

  • Companies with significant real estate holdings
  • Companies who renovate or expand their operations on a regular basis
  • Real Estate investors
  • Studies can be performed on a retroactive basis for assets placed in service in prior tax years

Applicable information necessary to get started includes a property address, a tax listing for fixed assets, purchase price, construction budget, depreciation schedule and renovation summary with costs.

How McGuire Sponsel can Help

Not only does McGuire Sponsel have an excellent track record with completing quality studies, but we can also work with you on more complex transactions. Many situations require a more detailed analysis to ensure the taxpayer can utilize the benefits. These situations can include passive loss issues, asset based acquisitions and 1031 transactions.

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Additional Cost Segregation Resources

Recent Articles

David McGuire
Cost Segregation and Car Dealerships

In recent years the rules surrounding depreciation have changed drastically.  At the same time many car dealerships have undertaken large construction projects.  This has led to a number of car dealerships looking at cost segregation and the tax savings that […] Read More

David McGuire
Required Use of ADS

As most tax professionals know, there are two depreciation systems for each type of asset: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Most taxpayers correctly utilize GDS, however there are times that the ADS must be […] Read More

David McGuire
The Use of 27.5-Year Depreciation

Use of 27.5-Year Depreciation We wanted to begin by discussing the 27.5-year depreciation for long term residential real estate.  This may seem pretty self-explanatory.  MACRS depreciation requires that “Non-Residential” Property be depreciated over 39-years while “Residential” gets 27.5 years.  However […] Read More

David McGuire
Is Cost Segregation Important Post Tax Reform?

Over the last few months while traveling to CPA firms around the country we seem to see similar questions.  One of the main questions relates to the necessity of Cost Segregation in the new tax environment.  With the lowered tax […] Read More

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