Cost Segregation Study

A Study That Will Help Investors Save Money

The Cost Segregation Study   depreciation with a cost segregation study

Purchasing commercial real estate, such as an apartment building, is a big capital investment. So, as owners, we want to do everything we can to ensure our acquisitions are profitable.

One such way to increase profitability is to claim a property’s depreciation. This is the gradual reduction in the basis of an asset over time due mainly to wear & tear.  Property owners use depreciation as a tax write-off. It’s used to shelter the income. A valuable tool that owners use to take the depreciation is through a cost segregation study. This study determines how much deductions then can take.  A cost segregation study can help generate great tax savings.

A cost segregation study allows an owner to re-allocate a large portion of costs to a shorter and accelerated method of depreciation. Certain costs previously subject to 39-year depreciable life, can instead be reclassified as personal property or land improvements. This can be done with a 5, 7, or 15-year rate of depreciation using a fast-tracked method.

An engineering-based cost segregation study enables commercial real estate owners to reallocate real property to personal property.

Personal property assets found in a cost segregation study generally include:

  • Non-structural items (I.e. wall covering, partitions, carpet, lighting fixtures, doors, electrical installations, plumbing, etc.)
  • Exterior land Improvements (I.e. as sidewalks and landscaping)
  • Indirect construction costs of a building.

Eligibility

Real property that is eligible for cost segregation includes buildings that have been purchased, built, expanded or renovated since 1987. The study is most efficient for newly constructed buildings. They can also be done for older buildings for catch-up depreciation.

Tax benefits of cost segregation

In addition to providing lower taxes, cost segregation can be beneficial in a number of ways:

  • Accelerated depreciation deductions: When an asset’s life is shortened, depreciation expense is accelerated and tax payments are decreased during the early years of a property’s life.
  • Audit trail. A well-documented cost segregation study helps resolve IRS inquiries at the earliest stages.
  • Retroactivity: Owners can capture retroactive savings on a property since 1987. Recapturing depreciation in one year can allow you to implement retroactive cost segregation analyses on older properties to increase cash flow in the current year. Owners are able to reclaim “missed” depreciation deductions from prior years without having to amend tax returns.
  • A reduction in current tax liability which frees up capital for other investment opportunities. It permits owners to shelter the income generated from the property.

 

Cost segregation studies are a very valuable tax strategy available to owners of both commercial and residential real estate today.  They are economically viable for almost any commercial facility. This includes apartment buildings.

A cost segregation study can generate tax savings from the following:

  • New buildings or those under construction
  • Existing buildings undergoing renovations or expansion
  • Newly purchased existing buildings
  • Tenant leasehold improvements

Any property can qualify for a study but the cost/benefit analysis may prevent lower valued properties from being good candidates.  Segregation studies can be costly and the fees can vary greatly depending on the property type & size.

 

Regardless of the fees; a cost segregation study should be based on time & materials or a fixed fee basis. They should not be based on a contingency basis (% of savings). Most reputable providers work on a fixed fee basis.

 

So hopefully this provides you a little insight into a Cost Segregation Study and how beneficial it can be to real estate investors. If you would like more information on cost segregation studies or want to know how getting involved in real estate can benefit you, drop us a line. We want to hear from you.

 

Remember, real estate doesn’t have to be complicated. With Simple Acquisitions it’s smart and simple!

Marc Dupuis

About Marc Dupuis

Marc got the real estate bug in his early twenties, and it’s never left. He has multi-faceted experience dealing with real estate investment companies. Marc’s is what you can call a real estate jack of all trades. He’s been an investor, landlord, property manager and builder in the Ottawa area since 1996 when he bought his first income property. He has since acquired a dozen income generating properties. He’s brokered property purchases for friends. He’s a partner in a commercial building and has built several new homes. His most recent build was featured in the May 2012 edition of Ottawa Magazine http://www.ottawamagazine.com/homes-gardens/2012/05/11/a-house-we-love-a-cliff-side-dwelling-in-chinatown-and-on-lebreton-flats/ Marc manages the research and acquisition activities for Simple Acquisitions, LP. He creates strategic alliances with financial institutions, property managers, brokers, attorneys, contractors, developers, and real estate investment companies on a daily basis. Marc is also the liaison between the company and its private lenders. Marc has an innate ability to see the end result when nobody else can. He’s known for bringing all the necessary resources together to achieve his goals. He loves to talk to aspiring investors and provide education and guidance where he can. He even sent a laptop to an unemployed man that he met at a gas Station in North Carolina who was down on his luck, in the hopes that it would be a tool that could help him learn about way to make a living.
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