Do you own one or more commercial properties? Not familiar with cost segregation? If your answer is YES, you are not alone.
Even if you were not familiar with cost segregation before reading this article, you need to know what it is and why it can put tens of thousands of dollars in your pocket.
Cost segregation accelerates the depreciation on your building/renovation components by properly categorizing them into shorter depreciation periods such as 5-, 7-, and 15-years rather than the conventional 27.
5- and 39.
5-year schedules.
Five and seven year items might include such things as decorative building elements, electrical for dedicated computer equipment, and carpet.
Fifteen year items might include such things as site utilities, landscaping and paving.
The engineered cost segregation study results in much higher depreciation expense and significantly reduces taxable income for the property owner.
Best of all, the IRS ruling states that cost segregation can be applied to all categories of buildings purchased or built or renovated since 1987, and there is no need to amend any of your previous tax returns to take advantage of the benefits.
Sound too good to be true? Well, it's not.
You may be wondering if this cash flow panacea can be legal.
Of course it is.
The legal basis comes from the US Tax court 109 T.
C.
21 decision.
In this precedent setting case, the IRS claimed that the Hospital Corporation of America (HCA) owed them over $800,000,000 in taxes.
The case was decided in favor of HCA on August 24, 1997 by Judge Tom Wells.
So, YES it is legal.
In fact, cost segregation has become an IRS approved tax strategy.
I suspect that it is now apparent why this is important to you as a commercial property owner - Lower Income Taxes and significant Cash Flow! Not convinced about the benefits a cost segregation study may have for you? Okay, let's look at some actual results.
Office Condo - Property Cost = $480,000; 1st Year Cash Flow = $12,783; 5 Year Cash Flow = $31,229.
Leasehold Improvements - Property Cost = $1,400,000; 1st Year Cash Flow = $53,751; 5 Year Cash Flow = $131,569.
Restaurant - Property Cost = $2,680,000; 1st Year Cash Flow = $71,374; 5 Year Cash Flow = $173,503.
Warehouse - Property Cost = $6,370,000; 1st Year Cash Flow = $108,488; 5 Year Cash Flow = $248,559.
Medical Facility - Property Cost = $8,900,000; 1st Year Cash Flow = $151,576; 5 Year Cash Flow = $347,281.
Apartments - Property Cost = $15,100,000; 1st Year Cash Flow = $236,763; 5 Year Cash Flow = $570,288.
Retail Center - Property Cost = $22,300,000; 1st Year Cash Flow = $379,793; 5 Year Cash Flow = $848,160.
I think you have to admit that these results are pretty impressive.
Here's the bottom line, if you haven't completed cost segregation studies for your properties, you are needlessly paying this money to the IRS instead of keeping it in your coffers.
I would be surprised if you were not thinking that your CPA is already doing this for you.
Not likely.
While most accountants are familiar with the approach, some are hesitant to recommend it without a documented analysis of correct depreciation amounts.
There are many complexities of the IRS designated building components that make it difficult for most accounting professionals to be knowledgeable of all applicable items on a specific property.
CPAs recognize that in order for the client to fully benefit, it is usually necessary to seek a qualified third party engineering specialist to provide an independent report used in supporting the owner's depreciation schedule.
Research shows that this tool is used only 5% - 10% of the time.
CPAs and other tax preparers may not routinely perform the study because it involves real estate appraisal methodology and specialized engineering knowledge outside the scope of a typical tax practice.
Although it is vastly under-utilized, cost segregation is no wildly speculative accounting tool.
In fact, the American Institute of Certified Public Accountants' National Journal of Accountancy has published numerous articles in support of cost segregation.
Even if you were not familiar with cost segregation before reading this article, you need to know what it is and why it can put tens of thousands of dollars in your pocket.
Cost segregation accelerates the depreciation on your building/renovation components by properly categorizing them into shorter depreciation periods such as 5-, 7-, and 15-years rather than the conventional 27.
5- and 39.
5-year schedules.
Five and seven year items might include such things as decorative building elements, electrical for dedicated computer equipment, and carpet.
Fifteen year items might include such things as site utilities, landscaping and paving.
The engineered cost segregation study results in much higher depreciation expense and significantly reduces taxable income for the property owner.
Best of all, the IRS ruling states that cost segregation can be applied to all categories of buildings purchased or built or renovated since 1987, and there is no need to amend any of your previous tax returns to take advantage of the benefits.
Sound too good to be true? Well, it's not.
You may be wondering if this cash flow panacea can be legal.
Of course it is.
The legal basis comes from the US Tax court 109 T.
C.
21 decision.
In this precedent setting case, the IRS claimed that the Hospital Corporation of America (HCA) owed them over $800,000,000 in taxes.
The case was decided in favor of HCA on August 24, 1997 by Judge Tom Wells.
So, YES it is legal.
In fact, cost segregation has become an IRS approved tax strategy.
I suspect that it is now apparent why this is important to you as a commercial property owner - Lower Income Taxes and significant Cash Flow! Not convinced about the benefits a cost segregation study may have for you? Okay, let's look at some actual results.
Office Condo - Property Cost = $480,000; 1st Year Cash Flow = $12,783; 5 Year Cash Flow = $31,229.
Leasehold Improvements - Property Cost = $1,400,000; 1st Year Cash Flow = $53,751; 5 Year Cash Flow = $131,569.
Restaurant - Property Cost = $2,680,000; 1st Year Cash Flow = $71,374; 5 Year Cash Flow = $173,503.
Warehouse - Property Cost = $6,370,000; 1st Year Cash Flow = $108,488; 5 Year Cash Flow = $248,559.
Medical Facility - Property Cost = $8,900,000; 1st Year Cash Flow = $151,576; 5 Year Cash Flow = $347,281.
Apartments - Property Cost = $15,100,000; 1st Year Cash Flow = $236,763; 5 Year Cash Flow = $570,288.
Retail Center - Property Cost = $22,300,000; 1st Year Cash Flow = $379,793; 5 Year Cash Flow = $848,160.
I think you have to admit that these results are pretty impressive.
Here's the bottom line, if you haven't completed cost segregation studies for your properties, you are needlessly paying this money to the IRS instead of keeping it in your coffers.
I would be surprised if you were not thinking that your CPA is already doing this for you.
Not likely.
While most accountants are familiar with the approach, some are hesitant to recommend it without a documented analysis of correct depreciation amounts.
There are many complexities of the IRS designated building components that make it difficult for most accounting professionals to be knowledgeable of all applicable items on a specific property.
CPAs recognize that in order for the client to fully benefit, it is usually necessary to seek a qualified third party engineering specialist to provide an independent report used in supporting the owner's depreciation schedule.
Research shows that this tool is used only 5% - 10% of the time.
CPAs and other tax preparers may not routinely perform the study because it involves real estate appraisal methodology and specialized engineering knowledge outside the scope of a typical tax practice.
Although it is vastly under-utilized, cost segregation is no wildly speculative accounting tool.
In fact, the American Institute of Certified Public Accountants' National Journal of Accountancy has published numerous articles in support of cost segregation.