About Cost Segregation

Cost Segregation is the IRS approved process of accelerating depreciation on a Real Estate asset by separating non-structural personal assets and land improvements from real property assets.

In general, buildings can be depreciated over either a 27.5 year (residential properties) or a 39 year (commercial properties) period based on their classification as Section 1250 property, but certain categories of assets within a building can be depreciated more quickly, over five, seven, or 15 years due to their reclassification as Section 1245 property.

These include non-structural personal assets, land improvements, leasehold improvements and indirect construction costs, when applicable. Separating these faster depreciating assets into their proper categories allows for the frontloading of the appropriate tax deductions, lowering upfront payments and increasing cash flow.

Why do cost segregation?

By performing a cost segregation study on an investment property, or property held for business, the owners are able to:

Accelerate income tax depreciation deductions

Recover missed accelerated depreciation deductions from previous years

Improve cash flow

Create an audit trail

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While tax savings vary, the positive benefits of a Cost Segregation study can be quite significant based on calculations involving the individual’s overall tax situation and the specific assets in any given property.

Having handled thousands of projects and studies, we estimate that approximately $275,000 in Net Present Value tax savings can be generated for each $1 million of reclassified assets. And, because many states follow the federal rules regarding depreciation, you can also save money on state tax returns.

Recent tax law changes under the Tax Cuts and Jobs Act of 2017 (TCJA) have given an additional boost to cost segregation.
Bonus depreciation (the federal tax incentive that allows a business to immediately deduct a large percentage of the purchase price of eligible assets) was increased from 50% to 100%, essentially allowing real estate investors to immediately expense anything less than 20 year property. A cost segregation study produced by Madison SPECS will separate any costs that qualify under the new bonus depreciation rules.
Who can perform cost segregation?
SPECS’ cost segregation studies are performed by accounting and engineering experts with experience in performing a thorough analysis of real estate.
SPECS’ cost segregation studies are performed by accounting and engineering experts with experience in performing a thorough analysis of real estate.
Their identifying and reclassifying eligible assets to shorter recovery periods is the key to the lowering of tax liability from the resulting accelerated depreciation on those assets.
Following FASB (Financial Accounting Standards Board) guidelines, they identify those assets, assess their value and determine the resulting tax deductions for depreciation. Upon completion, documentation is provided to support the results that are filed with the asset’s depreciation schedule.

When to do cost segregation?

Cost segregation is best performed prior to the filing of the initial depreciation schedule on an asset. This is immediately after the purchase of a newly acquired building, or once a construction project is completed and placed in service.

Cost segregation is best performed prior to the filing of the initial depreciation schedule on an asset. This is immediately after the purchase of a newly acquired building, or once a construction project is completed and placed in service.
However, missed depreciation for past purchases, construction, expansions, and renovations can be recouped later via a cost segregation study. In such cases, there is no need to amend already filed tax returns. “Catch–up” depreciation can be taken in one year by filing Form 3115 (Change in Accounting Method).
What type of property is a candidate for cost segregation?
Almost all investment properties, or properties held for business, are eligible for Cost Segregation. However, each property has its own unique characteristics that affect the percentages of depreciation you can accelerate. At Madison SPECS we can help you identify what property types in your portfolio are the best candidates.
Below is a list of some of the property types which bring higher amounts of accelerated depreciation.

Apartment Buildings

Retail Properties / Strip Malls

Assisted Living Facilities

Nursing Homes

Office Buildings

Medical

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