Cost Segregation

What is it? Cost segregation is a tax strategy approved by the IRS in 1997 which allows companies and individuals, who have purchased, constructed, expanded, or remodeled any type of commercial real estate, to reclassify specific real property assets. Usually receiving a depreciation life of 39 years * (commercial real property) or 27.5 years (commercial residential property) this method results in “tangible personal property” being treated as 5-year property or land improvements being treated as 15-year property for purposes of depreciation. Portions of the electrical, plumbing, mechanical systems, and site improvements of a building along with hundreds of other components can be allocated into shorter lives translating into immediate cash flow!

* Note two-thirds of Oklahoma, because of its unique Native American heritage, qualifies for special federal tax treatment under very specific parameters, i.e. quicker depreciation than the national norm. For those already utilizing this accelerated depreciation schedule, cost segregration will depreciate properties quicker than this treatment but also factors the aforementioned electrical, plumbing, mechanical systems, and site improvements of a building along with hundreds of other components into the equation! Kindly note that all figures estimated on this website assumes a 39-year depreciation schedule thus for those firms/individuals already using Oklahoma accelerated schedule the figures would be slightly less but cost recovery could still be very much realized.

“Cost Segregation is a lucrative tax strategy that should be used In almost every major purchase of commercial real estate.” — U.S. Treasury Department

Time Value of Money Using this mode of accounting effectively increases taxpayer’s depreciation expense in today’s dollars. By recovering up to 40% of the building cost over the first 5 years as opposed to depreciating it over 39 years, translates into significant tax savings and taps into the concept of the “time value of money”. In other words this substantially increases taxpayers present value of available dollars.

How much cash are we talking about? On average our segregation study offers approximately $150,000 in additional depreciation per $1 million dollars in purchase or construction costs over the normal 39-year straight line method.

History of Cost Segregation Over 300 rulings, letters, and IRS memoranda have provided documentation and significant case law for the support of Cost Segregation Studies: Hospital Corporation of America vs. The Commissioner is one of the landmark decisions which gave support to the way we review and analyze your property/properties to determine the tangible personal property within your building(s) which may qualify for depreciation lives of 5, 7, or 15 years rather than 39 years (nonresidential real property) or 27.5 years (residential real property). Even if you are presently depreciating certain property in an accelerated schedule there may still be cost recovery left on the table. Only if you have secured specialized experts (per the IRS) will all allowable property be depreciated on an accelerated basis.

Who / What Qualifies?
• Purchased or constructed a building (land is excluded) of $500,000 and above or leaseholder who has spent $250K or more on improvements (e.g. purchases, renovation, fitout) since 1987. Has paid federal taxes within the last four years or plans to this year.
• Plans on holding property for at least 2 years.
• Plans on conducting a demolition or major renovation project.
• Has owned the building after 1987.

Property Type Reclassification Property Type Reclassification
Restaurants 20~45% Apartment Buildings 20~45%
Hotels 30~50% Fitness Centers 22~45%
Shopping Malls 22~40% Banks 30~47%
Medical/Dental 22~35% Manufacturing 30~45%
Warehouses 22~40% TV/Radio/Cell Firms 22~40%
Airplane Hangers 18~35% Leaseholds 18~40%
CC & Courses 28~60% Research Facilities 22~45%
Retail Facilities 18~35% Assisted Living/Retirement 22~45%
Theme Park 16~22% Resorts 25~45%
Office Buildings 20~35% Wineries 18~25%
Grocery Stores 20~45% Mixed Use Properties 18~30

* The actual savings vary according to the design of the facility, specific use, date of service and the actual costs associated with the property.

Feasibility report We will provide a no-cost, upfront feasibility report to determine the cash flow and net present value (NPV) benefits.

Initial consultation to make sure a study will be beneficial Certainly, the initial benefits of a Cost Segregation Study may be impacted by corporate structures, individual tax situations, subsequent disposition of a property, a 1031 exchange, recapture implications, passive activity limitations, REITS and other subsequent events that a real estate investor may encounter post Cost Segregation Study.

Who You Hire Makes All The Difference
• Frequently Cost Segregation competitors “estimate” or just “assume” a percentage of the basis to reclassify. This as a practice is all too often employed by providers – unfortunately at the expense of the taxpayer/owner. This approach not only leaves many thousands (often hundreds of thousands of dollars) unavailable to the owner/taxpayer – but more importantly this practice puts the client at risk. This approach often has a modest fee attached – the provider assuming that the owner/taxpayer is unsophisticated and will compromise on benefits as well as assume the risk with the IRS in case of an audit. All of our work will withstand IRS scrutiny and is backed by Core Solutions Group’s Unlimited Audit Defense and Client Satisfaction Guarantee.
• We understand that Cost Segregation Reports are a serious tax matter that involves IRS scrutiny. We will not take the approach of short-term gain to risk long-term reputation and have gone to great lengths to use the latest tools, methods and procedures to deliver the most detailed and comprehensive reports in the industry, according to strict IRS rulings and requirements.
• We are one of the few firms in the country to perform the RSMeans Tolerance Test. This is a comparison of the constructed cost of the building compared to the national average in terms of square foot, cost and percentage of assets within the total cost of electrical, mechanical and personal property elements. If we find significant differences such as 15% electrical versus the national average of 10% for like kind building we will then document the difference to the IRS. Most firms simply guess. Although this takes us a considerable amount of time, we can be much more accurate which leads to greater audit defense and a lot of the time, a larger cash benefit to the client.

Our Process
• Provide a no-cost property review or feasibility report to determine the cash flow benefits.
• Evaluation of current tax status and future business plans with CPA to determine if a study will be a benefit.
• Review of the project’s/facility’s construction cost by component or systems.
• On site visit of the facility/project to document the systems and components to determine how they’re utilized. Site photos are always taken.
• A detailed engineering review of assets including special purpose mechanical, electrical and plumbing, decorative finishes, site improvements and special purpose construction. As well as blueprints, AIA documents, and change orders.
• Classification of each building component into the appropriate tax life as prescribed by the IRS guidelines and relative case law.
• Finally, we deliver a 110-page written report with an executive summary, asset detail supporting the reclassified cost, specific case law and revenue rulings, depreciation schedules and all of the necessary tax forms.

Pricing We charge a very competitive fixed fee based on size and scope of each project.

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