Cost Segregation
A company’s real estate holdings may be a source of hidden tax savings. A real estate cost segregation study can generate immediate tax savings and improve cash flow through accelerated depreciation.
Invaluable Tax Saving Tool
Increase Cash Flow. Accelerate Depreciation Deductions. Defer Federal and State Income Taxes.
Cost segregation is an invaluable tax savings tool. It allows companies and/or individuals who have constructed, purchased, expanded, or remodeled real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes. Cost segregation studies achieve this through identifying, segregating, and reclassifying personal property assets and land improvement assets which are depreciated over shorter tax lives as compared to the traditional 27.5-year (residential rental property) or 39-year (nonresidential real property) lives.
The ideal time to begin a cost segregation study is when a property is first placed in service. However, a cost segregation study can be performed on any property already in service. IRS procedures allows a change in accounting method to take advantage of misclassified assets without amending prior tax returns. This procedure allows the recapture of the understated depreciation expense for any asset that has been reclassified in previous tax years. Cost segregation can also be used in the event of a like-kind exchange or a step-up in basis that has been recorded.
Other Cost Segregation Services
- Look Back Studies
- Repair Studies
- Section 179 Studies
Potential Reallocation of Costs to Shorter-Lived Property
| TYPE OF PROPERTY | LOW RANGE | HIGH RANGE |
| Apartments | 10% | 35% |
| Car/Truck Dealerships | 20% | 40% |
| Supermarkets | 15% | 40% |
| Hotels/Resorts | 15% | 50% |
| Assisted Living/Nursing Homes | 15% | 30% |
| Medical Offices | 20% | 40% |
| Restaurants | 15% | 30% |
| Retail/Shopping Centers | 15% | 40% |
| Light to Heavy Manufacturing | 20% | 60% |
| Tenant Improvements | 10% | 50% |
| Warehouse/Distribution | 5% | 30% |
| Gas Stations/Convenience Stores | 25% | 50% |
Case Studies
A taxpayer constructed a processing plant for $6.9M excluding land and equipment. Withum identified 7-year property and 15-year property that resulted in additional depreciation deductions, and bonus depreciation of $2.2M, resulting in increased cash flow from the income tax deferral of $925K.
$2.5M
Bonus Depreciation
A taxpayer constructed a plant for $12,100,000 excluding land and equipment. Withum identified 7-year property and 15-year property that resulted in additional depreciation deductions, and bonus depreciation of $6.2M, resulting in increased cash flow from the tax deferral of $2.7M.
$6.2M
Bonus Depreciation
A taxpayer purchased two convenience store/gas station/car wash buildings for $1.6M excluding land and equipment. The taxpayer depreciated the entire property over 39-years. The cost segregation study resulted in the reclassification of all property to 5-year property and 15-year property, resulting in additional deductions of $850K and increased cash flow from the income tax deferral of $348K.
$850K
Additional Depreciation
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Cost Segregation Explained
Cost segregation is a method that creates revenue in the form of reducing current taxes for real estate owners and developers. The process allocates the entire costs of a building or other property into components that cause an acceleration of tax deductions with a resulting deferral of federal and state taxes. While the study’s purpose is to reduce current taxes they are usually prepared by engineers.