What is What is Cost Segregation?Cost Segregation?

The IRS approved method for accelerating building depreciation for Commercial and Residential Rental properties. It is a detailed process which includes identifying the building components that should be properly classified as tangible personal property or land improvements, rather than real property that is depreciated over 39 years (or 27.5 for Residential Rental).

Cost Segregation Is:

The US Treasury Department StatesThe US Treasury Department States:

“Cost Segregation is a lucrative tax strategy

that should be used in almost every major

purchase of Commercial Real Estate.”

Wall Street Journal – June‚03

A cost segregation study is an in-depth analysis of the cost incurred to build, acquire or renovate a real estate holding.

The primary goal is to identify all construction related costs that qualify for accelerated income tax depreciation.

A true engineering based cost segregation study will identify and assign costs to all building components including those in the 39 year depreciation category.

Cost Segregation Defined:

Why Use Cost Segregation?

Taxes are one of the largest expenses for commercial property owners.

Significant federal income tax benefits can be derived from utilizing shorter recovery periods.

Engineering-based cost segregation studies allow commercial real estate owners to take what would otherwise be classified as 1250 property for depreciation purposes and reclassify it as more rapidly depreciating 1245 property.

This reclassification results in substantial cash flow benefits in both current and future years through substantially shorter depreciable tax lives and accelerated depreciation methods.

The Basics of Cost The Basics of Cost SegregationSegregation

Traditionally, a building’s actual cost is divided between land and building.

For example: 20% to Land (which is Non

Depreciable) and 80% to Building

The 80% allocated to the building is then typically depreciated using 39 year straight line depreciation.

Typically, only 3% of a buildings cost is classified to reap the greatest tax benefit.

Assets such as furniture, fixtures, and equipmenthave properly been classified and claimed as

“personal property”.

The remainder of the building is assigned a depreciable life of 39 years.

(27.5 Years for residential rental property)

Cost Segregation Cost Segregation BreakdownBreakdown

Before After

39 years*

5 Years

7 Years

15 years

39 years*

* 39 Years for Commercial Property and/or 27.5 Years for Residential Rental Property

S1245Personal Property

200%DBDouble Declining Balance Method

Land Improvements

150% DB

S1250 Real Property

Straight Line

Class

Segregate

Basics of Cost SegregationBasics of Cost Segregation Personal Property (1245) – Eligible for 5 or 7 year

depreciation using double declining balance method (200%DB). Includes items such as carpeting, certain fixtures, equipment hookups, computer cabling and raised floors.

Land Improvements - Eligible for 15 year depreciation using 150% declining balance. Includes items such as sidewalks, fences, site utilities, landscaping and a portion of excavation.

Real Property (1250) - Structural components that relate to overall structure of a building. Includes parts of a building such as walls, ceilings, HVAC, roofs, floors and permanent coverings.

Types of Components We Segregate and Reclassify In Our Studies:

Communication Systems Transformers Hospitality Fixtures TV Outlets & Wiring Distribution Panels Distribution Wiring High Voltage Switchgear Data Jacks Miscellaneous Outlets Emergency Power Computer Data / Power Supply / Exhaust –

Kitchens Removable HVAC

Systems Environ. Control –

Computer Environ. Control –

Communications Specialized Fire

Protection Systems Specialized Air Filtration /

Waste Interceptors Security Access &

Monitoring Systems Conduit / Wiring to

Special Systems Flex Space Demountable Power

Systems Shower / Deluge Fixtures,

Supply & Waste Specialty Gas /

Compressed Air Systems Millwork Floor Coverings Window Treatments Wall Coverings Demountable Walls Decorative Lighting Signage Sidewalk & Curbing Parking Lots & Curbing Site Utilities

Fencing Specific-Use Structures

Foundations Mezzanines Stairs Platforms Structural Steel Task Lighting Vents Beams Columns Gas, Vacuum,

Compressed Exhaust Systems Audio / Visual Systems Buss Ducts Neutralization Basins Humidity / Temp. Control Site Utilities Sewer & Drainage

Systems Outdoor Lighting

““Our engineers look beyond the obvious Our engineers look beyond the obvious items and evaluate every single key items and evaluate every single key component associated with a property.”component associated with a property.”

Questions to Think AboutQuestions to Think About Is the asset necessary for the taxpayer to carry on the

particular trade or business? (i.e. Bank Vault Doors, Stadium Seats)

Is the item so closely related to an item of equipment that the two will be retired contemporaneously? (i.e. Wiring, Safety Switches)

Is the item necessary to meet specific temperature or humidity requirements essential for the operation of other machinery or the processing of materials or food? (even certain structural components can qualify here)

Can the asset be moved or has it been moved? ◦ How difficult and time consuming is moving the asset?◦ Is the asset designed or constructed to remain permanently in

place?◦ How much damage will the property sustain during removal?◦ How is the component affixed to the structure/land? A

component perceived to be permanent may fail to qualify as personal property.

Does the building have an adjusted cost basis of $750,000 or greater?

Does the owner operate as a For-Profit Entity and pay Federal income taxes?

Does the owner plan to hold the property for one year or longer?

Cost Segregation Requirements:

We provide a free Cost-Benefit Analysis for each and every property.

In the analysis we will provide our flat fee to complete the study along with a conservative estimate of benefits.

This provides the owner the ability to make an educated decision whether or not to go forward with the study based upon the anticipated return on investment.

No Cost, No Obligation Cost-Benefit Analysis

Contact Us Today for your Free Cost-Benefit Analysis!

Why provide the Federal Government with an Interest Free Loan for the remaining 39 years of your buildings’ depreciable life?

OROR

YourselfYourselfIRSIRS

Who would you rather pay?