How to Find Cash Under Your Own Roof

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If there were thousands of dollars sitting in your building, would you look for it?  Of course you would! A cost-segregation study can provide tremendous tax benefits and improved cash flow, leading your organization to find money right under your own roof.

What is a cost-segregation study?

A cost-segregation study identifies assets and their costs, and classifies those assets for federal tax purposes. Cost-segregation enables the owner to reallocate real property under IRS Code Sec 1250 to personal property under IRS Code Sec 1245. Commercial buildings are depreciated over a 39-year life.

A cost-segregation study breaks out the components of the building. Certain costs that may be classified as 39-year property can instead be classified as personal property or land improvements, with a 5, 7, or 15-year life. These costs can then be depreciated using accelerated methods. A cost-segregation study allows the owner to depreciate the structure in the shortest amount of time permissible under current tax laws, saving tax dollars.

Advantages of a cost-segregation study

The primary benefit of a cost-segregation study is an immediate increase in cash flow. Taxes are deferred resulting in current tax savings. The time-value of money is the idea that money available at the present time is worth more than the same amount in the future, due to its earning potential.  Because of this, there is a great advantage of these front-loaded deductions compared to the deductions spread over a long period of time. In addition, there could be additional tax savings when deductions are taken during high tax bracket years versus possible lower tax brackets in future years, such as retirement years.

Disadvantages of a cost-segregation study

A cost-segregation study does come with costs. The cost of the engineering study and the triggering of depreciation recapture and understatement penalties for taxpayers that use cost-segregation too aggressively can be considered disadvantages to pursuing the study.

What are the circumstances for a cost-segregation study?

The three prime circumstances for using a cost-segregation study are as follows:

  • Newly constructed building
  • Purchase of an existing building
  • Major renovation of an existing building

The cost of the building, renovations that are taking place, and highly specialized buildings are all important considerations for cost-segregation studies.

How do you know if your organization should undertake a study? The general rule of thumb is a cost of $1 million dollars or more for a cost-asset value segregation to be worthwhile.  Medical practices typically have very specialized features such as plumbing, electrical systems, and cabinetry and countertops that may warrant conducting a cost-segregation study.

The Bottom Line

Cost-segregation studies can be a valuable tax strategy for owners of commercial real estate. A commercial cost-segregation study creates an opportunity to defer taxes, reduce the current tax burden, and free capital by improving cash flow. Owners of commercial real estate should always consider and evaluate the benefits of a cost-segregation study when purchasing or renovating a building.

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To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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