Engineering-Based Cost Segregation

It is not uncommon for a cost segregation study to generate hundreds of thousands or even millions of dollars in net-present value savings. The average study will allocate approximately 20% - 40% of the depreciable cost to shorter lives. For every $100,000 moved from 39-year to 5-year the 10-year net-present value savings is approximately $25,000.

No. A cost segregation study can be performed on any property acquired after 1986, and any missed depreciation can be claimed in the current tax year by calculating the §481(a) catch-up depreciation and filing a Form 3115 – Change In Accounting Method.

Probably not, at least not with the appropriate level of detail or defensibility. CPAs simply do not have the expertise necessary to properly break-out all the assets that are considered in a cost segregation study. And why should they? After all they are CPAs not engineers. That said, some accounting firms do have trained engineers on staff to perform cost segregation studies.

Cost segregation will not automatically trigger an audit. However, the IRS has been getting more aggressive about the review of cost segregation studies, specifically with respect to the methodologies being used and the qualifications of the preparer. Per the IRS Audit Techniques Guide, studies being performed by unqualified individuals and those using an abbreviated methodology will receive higher scrutiny than the ones performed by qualified professionals who use the detailed engineer approach.

Green Summit Engineering only produces Cost Segregation Studies utilizing the "Detailed Engineering Approach", and every report is signed and sealed by a Licensed Professional Engineer.

The best time for a cost segregation study is typically the year the property is placed in service by the current owner. It is generally most beneficial to maximize depreciation deductions from year one.

The fee for a cost segregation study can vary greatly depending on the property type, size, and complexity. Green Summit bases its’ fees on the estimated time the project will require, and accounts for all other costs such as travel which is presented in our benefit analysis and engagement letter.

Yes. Look-back studies can be performed on properties placed in service as far back as January 1, 1987. Of course, it may not make sense to perform a study on a property that was placed in service 20 years ago, unless significant improvements have been made. This is because most of the depreciation has been taken and the cost of do¬ing the study would not necessarily be worth the benefit derived. However, this is not always the case. The facts and circumstance will ultimately be the deciding factor.

Regardless of whether you have had a cost segregation study performed or not, when you sell a property you will recognize either a gain or a loss. When you sell for a gain you pay taxes on that gain. The amount of tax is based on the capital gains rate for real property (§1250) and the taxpayer’s ordinary income rate for personal property (§ 1245). When a cost segregation study is performed, items that would normally be considered real property are instead allocated to personal property. The ordinary income rate can be higher or lower than the capital gain rate, depending on the situation. If higher, the amount of tax due upon a sale would most likely be more if a cost segregation study were performed. However, the financial impact of the cost segregation study will often outweigh the adverse effect of the ordinary income rate. The bottom line is that this is truly a “facts and circumstances” situation and will require some additional analysis on the front end.

It should be noted that Rev. Proc. 2008-52 includes a provision that allows taxpayer to benefit from cost segregation after sale, in the year of disposition. The recapture issues discussed above still apply, but this may be an opportunity worth considering, especially if you sold your property at a loss.