What is Cost Seg?

Who needs a cost segregation study?

Generally, long term holders of real estate. The group includes developers, real estate investment companies, high net worth individuals, property management companies, bankers, and company owners with multiple office/plant locations.
Example: A medical group purchased a medical office building for $5,000,000.
Standard procedure: Allocate $500,000 of the purchase price to non-depreciable land, and depreciate remaining $4,500,000 over 39 year period as commercial real property.
Alternative: Through a cost segregation study, 16% of total building cost are allocated to 5 year property and 18% to 15 year property.
Impact: Total depreciation expense in years 1-5 is increased by $711,000 and tax liability is decreased by $277,290. Over the depreciable life of the asset, the total expense is identical, but shortening the depreciable lives of a portion of the purchase significantly increases after tax cash flow.
Benefits of a cost segregation study include:

An immediate increase in cash flow
The deferral of taxes
The ability to reclaim depreciation deduction from prior years that were under estimated without having to amend previous tax returns.

Why a Specialist is Needed

The IRS’s Audit Techniques Guide (ATG)

The Take Away:

One of the most important metrics for real estate is “after tax return”. It’s the amount return you get to keep that counts.

Tax savings can be deployed for further gain in your company or additional real estate investment.

Timing is important. The tax savings is shifted from later years to the early year of the investment when needed the most.

Benefits of Cost Segregation

This building had a book value of $2,300,000. Total property reallocated was $651,111. Increased tax savings in the first seven years of ownership was estimated at $201,897.

Historic Court House Building
This building had a book value of $1,464,192. Total property reallocated was $490,898. Increased tax savings in the first seven years of ownership was estimated at $191,450.

Advance Auto Parts
This building had a book value of $5,687,000. Total property reallocated was $1,274,399. Increased tax savings in the first seven years of ownership was estimated at $467,016.

Packard Office Building
This building had a book value of $8,560,000. Total property reallocated was $2,910,000. Increased tax savings in the first seven years of ownership was estimated at $1,309,680.

Holiday Inn Express Hotel
This building had a book value of $2,700,000 . Total property reallocated was $526,188. Increased tax savings in the first seven years of ownership was estimated at $226,261.

Medical Office Building
Coming soon!

Photo