Consulting

Cost Segregation

Cost Segregation is a provision through which particular portions of real estate (owned or leased) can be reclassified for depreciation purposes. Specifically, as allowed by recent court cases and authoritative pronouncements, certain portions of buildings and surrounding real assets can be depreciated over shorter periods of time than the traditional periods of 27.5 or 39 years.

While the total deduction over the 27.5 or 39 years does not change, the timing of the deduction does. Possessing various assets with shorter class lives, means they can be written off more quickly. This acceleration of depreciation periods translates into considerable cash flow savings. Warren Averett is positioned to guide commercial and residential property owners and lessees through the recent tax rulings that have opened the door to significant savings.

Types of properties that may benefit from a Cost Segregation Study include, but are not limited to:

• Apartment buildings
• Auto dealerships/ service centers
• Banks
• Daycare centers
• Distribution centers
• Gas stations
• Hospitals
• Hotels
• Manufacturing facilities
• Marinas
• Nursing homes
• Office buildings
• Restaurants
• Retail stores & plazas
• Ships/ Ocean cargo vessels
• Truck terminals
• Warehouses

Benefits of a Cost Segregation Study

• The cost of the analysis is relatively inexpensive compared to the ultimate savings.
• Amended tax returns do not need to be filed as the IRS has an automatic change procedure that allows taxpayers to file forms with their current tax returns and realize the benefit in one year.
• Increased depreciation in earlier years.
• Increased cash flow.
• Allows for future write-offs when structural components are replaced.
• Creates losses so you can carry-back if needed and carry-forward when applicable.
• Taxpayers can receive and extra 30% and/ or 50% depreciation deduction on new "qualifying" assets.

Do the math

Without a cost segregation study a building acquired for $1.9M depreciated over a 39-year life will have an annual tax deduction of approximately $48,000. Over a four-year period, the total deduction would amount to approximately $192,000.

With a cost segregation study qualified components of the building would be reclassified from 39 years to 3-, 5-, 7-, and 15-year lives resulting in a revised depreciation deduction of $488,000 over the same four years. Over the life of the building, the cash flow savings as a result of a cost segregation study would be approximately $124,000. The savings is computed by applying a 44% tax rate over the additional accelerated depreciation of $296,000, utilizing in this case, an 8% discount rate.