Although project scheduling in 2022 is at best challenging, it’s important that owners make time for cost segregation analysis when acquiring, rehabbing or constructing a property. This tax consulting service uncovers components of acquired or newly constructed buildings that are eligible for accelerated tax depreciation.
What are the benefits?
Cost segregation can maximize the amount of short-life property the owner recognizes (typically five-, seven- or 15-year tax depreciation) versus the default long life for real estate (typically a 27.5- or 39-year tax depreciation). There are several reasons this is beneficial:
- By accelerating tax depreciation, property owners can defer reported income to future years and, in turn, defer income tax obligations.
- The overall income tax obligation is still paid, but the benefit can be quantified in terms of the present value of these tax deferments.
- There may be federal, state and local tax benefits realized from separating the cost of any personal property from that of the real property. Although this process does not increase the amount that can be written off, the accelerated recovery period increases cash flow in the early years, allowing the funds to be invested or used in business.
- Applicable to residential, industrial, office and retail properties, cost segregation may be beneficial to both lessors and lessees.
- In addition to benefiting regular income taxpayers, it can also benefit REITs in the form of the present value of deferred dividend.
When should a cost segregation study be conducted?
A cost segregation study can be completed any time after the acquisition, rehabilitation or construction of a property, but the best time is immediately after the improvements are constructed, acquired or renovated.
What assets can generally be written off faster?
Real property not only includes land and building improvements, but also all the interior fit-out, personal property and exterior components. Generally, 20% to 40% of those components fall into tax categories that can be written off faster than the building improvement. As a quick example, certain electrical outlets that are dedicated to equipment such as appliances or computers should be depreciated over five years.
What happens in an analysis?
Analysts typically perform a detailed property inspection, review construction cost detail and available construction drawings and consider other available descriptive information on the subject property. Cost estimates are prepared of the property eligible for accelerated depreciation along with a thorough report detailing the findings. This report is used as support for the property owner’s advantageous tax reporting position. Cost segregation consulting should be performed by an engineer with familiarity in the construction and cost estimating fields, expertise in tax law, and experience in preparing and defending work products that may be reviewed by the IRS.
Cushman & Wakefield Valuation & Advisory offers in-house cost segregation engineering professionals with many years of tax consulting experience and can provide a detailed benefit projection and fee quote as a courtesy. Contact Jim Farrer or David Koller.