Frequently Asked Questions

Cost segregation is a strategic tax planning tool that allows companies and individuals who have constructed, purchased, expanded, or remodeled any kind of real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes. 

1. Accelerate Depreciation: By conducting a cost segregation study, you can take advantage of the concept of accelerated depreciation.  Traditionally, residential and commercial properties are depreciated over 27.5 and 39 years, respectively. However, a cost segregation study allows you to identify components of your property that can be reclassified into shorter recovery periods, such as 5, 7, or 15 years. This means you can deduct a larger portion of your property's value earlier, resulting in substantial tax savings.
2. Increase Cash Flow: Through accelerated depreciation, a cost segregation study significantly enhances your cash flow.  By deferring tax payments and increasing your deductions in the early years, you can retain more money in your pocket.  This additional cash can be reinvested into your property, used for renovations, or redirected towards other business ventures, improving overall financial flexibility.
3. Optimize Tax Planning: A cost segregation study allows you to align your tax planning with your property's specific characteristics.  By conducting a detailed analysis of your building's components, the study identifies assets that qualify for shorter depreciation periods, such as HVAC systems, electrical wiring, flooring, and more. This tailored approach maximizes tax benefits by ensuring accurate and optimized depreciation deductions.
4. Capture Retroactive Benefits: Don't worry if you haven't conducted a cost segregation study when you initially acquired your property.  Even for properties you've owned for several years, it's still possible to capture retroactive benefits. Through a process known as "catch-up" depreciation, you can reclassify certain assets and amend previous tax returns, allowing you to recoup previously missed tax deductions.  This can result in a significant influx of cash flow and a valuable opportunity to optimize your overall tax strategy.
5. Comply with IRS Guidelines: It's important to note that cost segregation studies should be conducted in compliance with the Internal Revenue Service (IRS) guidelines and regulations.  Partnering with experienced professionals in this field ensures that your study meets all necessary requirements, minimizing the risk of audit-related issues.

Any property owner who has purchased, constructed, or remodeled a building for business purposes can potentially benefit from a cost segregation study. This includes commercial property owners, rental property owners, and businesses of all sizes across various industries. 

A cost segregation study involves a team of trained professionals analyzing your property and identifying parts of it that can be  classified as personal property or land improvements, which are  depreciated over a shorter time frame compared to the building itself.  This accelerates depreciation deductions, which reduces current income tax obligations. 

The length of a cost segregation study varies depending on the  complexity and size of the property, as well as the detail of the  available records. On average, a study might take between 4-6 weeks from start to finish, but may be expedited on a rush if necessary. 

The savings from a cost segregation study depend on various factors,  including the cost of your property, its age, its use, and current tax  rates. Generally, a cost segregation study can potentially save  thousands to hundreds of thousands of dollars in tax payments over the  life of the property. 

While cost segregation can provide significant tax savings, it's not  always the best strategy for everyone. For instance, if you plan to sell  the property in a few years, the recaptured depreciation could outweigh  the initial tax savings. We recommend consulting with a tax  professional to assess your individual situation. 

Yes, that's correct.  If you conduct a cost segregation study on a property and generate additional depreciation deductions, those deductions can generally be used to offset passive income from other rental properties, partnerships, S corporations, or other qualifying passive activities.  This allows you to reduce your overall taxable income and potentially lower your tax liability.  However, please note  that tax laws and regulations can be complex and subject to change, so it's crucial to consult with a tax professional who can provide personalized advice based on your specific situation and the most up-to-date tax guidelines. 

While cost segregation savings are commonly used to offset passive income, certain professions in the real estate industry may also qualify to offset the additional depreciation deductions against their active income. Here are some examples of professions that may be eligible:

• Real estate agents or brokers actively engaged in buying, selling, leasing, or managing properties on behalf of clients.
• Real estate developers involved in acquiring land, obtaining permits, designing, constructing, and selling developed properties.
• Real estate investors actively involved in searching for and acquiring properties, negotiating deals, managing properties, and engaging in investment-related activities.
• Real estate consultants or analysts providing advisory or analytical services related to real estate, such as market research or investment analysis.
• Real estate attorneys specializing in property transactions, contracts, and legal matters related to real estate.
• Mortgage bankers/brokers actively involved in loan origination and financing activities for real estate transactions.
• Custom home builders actively engaged in the construction process and subsequent sale of custom homes.
• Real estate appraisers providing property valuation services.
• Real estate marketing professionals developing and implementing marketing strategies for real estate agencies, agents, or properties.
• Real estate syndicators pooling investor funds to acquire and manage real estate properties.

While it's not common, cost segregation studies can be audited by the IRS. It's important to choose a reputable cost segregation firm that follows IRS guidelines to minimize the risk of audit. 

Cost segregation can be applied to many types of properties including commercial buildings, apartment complexes, manufacturing facilities, hotels, and more. 

Bonus depreciation is a tax strategy that allows real property owners, such as residential or commercial property owners, to deduct a significant portion of the cost of eligible assets in the year they are placed in service. By conducting a cost segregation study specifically  tailored to real property, owners can identify and reclassify certain components of the property, such as lighting fixtures or landscaping, to qualify for bonus depreciation. This enables them to accelerate depreciation deductions, reduce taxable income, and potentially uncover significant tax savings while improving cash flow. 

 In a cost segregation study for a fully furnished short-term rental property, the analysis identifies and classifies the different components, including the building and furnishings.  The study allocates the purchase cost between these components and calculates depreciation  deductions based on their recovery periods.  Furnishings, being classified as personal property, are represented separately on the tax  return and cost segregation study.  By reclassifying furnishings to shorter recovery periods, the study maximizes tax benefits through accelerated depreciation, optimizing the overall tax strategy for the buyer. 

MACRS ( Modified Accelerated Cost Recovery System) is the depreciation system in the US tax code that recovers the cost of tangible property over a specific period.  In a cost segregation study, MACRS is important because it allows for the reclassification of assets into different property classes with shorter recovery periods.

The study identifies components of a property that qualify as personal property, land improvements, or certain building components, which have shorter depreciation periods under MACRS.  By reclassifying these components, property owners can take advantage of accelerated depreciation, resulting in increased tax savings and improved cash flow.

In summary, MACRS provides the framework for depreciating assets, and a cost segregation study utilizes this framework to identify and reclassify property components, maximizing tax benefits.

 Form 4562 is used to report depreciation and amortization deductions for assets placed in service during the tax year. Here's how it relates to cost segregation study analysis:

1. Asset Classification: A cost segregation study identifies assets within a property that qualify for shorter recovery periods.  Form 4562 provides a structured format to report these assets and their corresponding depreciation categories.
2. Depreciation Deductions: The form allows taxpayers to calculate and report depreciation deductions based on the recovery periods of the assets.  This includes reclassified assets from a cost segregation study, which may have shorter recovery periods than the property's default depreciation period.
3. Record-Keeping: Form 4562 serves as documentation, recording the reclassified assets, their depreciation categories, and associated deductions.  It supports the taxpayer's position in case of an audit by providing a clear record of claimed depreciation deductions.

In summary, Form 4562 is relevant to cost segregation study analysis as it enables the reporting and claiming of depreciation deductions for reclassified assets.  It ensures compliance with tax regulations and accurately reflects the benefits obtained from the study in the taxpayer's tax return.

The 3115 form, known as Application for Change in Accounting Method, is vital for cost segregation studies.  It enables taxpayers to request a change in their depreciation accounting method. Here's why Form 3115 matters:

1. Change in Accounting Method: Cost segregation studies often require a shift in depreciation method. Form 3115 is used to formally request this change, allowing assets to be reclassified and depreciated using accelerated methods identified in the study.
2. Retroactive Adjustment: Form 3115 permits retroactive adjustments for assets that should have been depreciated differently in prior years.  This "catch-up" adjustment recovers missed depreciation deductions, leading to significant tax savings and increased cash flow.
3. Compliance and IRS Approval: Filing Form 3115 ensures compliance with IRS requirements. It provides necessary documentation and explanations, minimizing the risk of an audit or challenge.  The form requires details about the taxpayer's current and proposed accounting methods, ensuring accurate reporting.
4. Consistency and Accuracy: Submitting Form 3115 reflects a commitment to accurately report reclassified asset depreciation.  It ensures proper implementation of cost segregation study findings and consistent application in future tax years.

In summary, Form 3115 is crucial for cost segregation studies, facilitating necessary accounting method changes, allowing retroactive adjustments, ensuring compliance, and promoting accuracy.  Filing the form properly maximizes the tax benefits derived from the study.

A Section 179 expense is a tax provision allowing businesses to deduct the full cost of qualifying assets in the year they are placed into service.  When combined with a cost segregation study, it brings significant benefits. Businesses can immediately deduct asset costs, improving cash flow.  By identifying assets eligible for shorter recovery periods, they can optimize depreciation and maximize tax savings.  The Section 179 expense also allows for retroactive benefits, reclaiming missed deductions.  It's a powerful tool to reduce tax liabilities and align depreciation strategies effectively.