Cost segregation evolved as the result of multiple court cases and IRS rulings. The body of knowledge is summarized in the Audit Techniques Guide (ATG), published by the IRS.
Component depreciation was a prior methodology that produced similar results via separating a building into components. These components often included the roof, plumbing, electrical and elevators. There were concerns some investors were using component depreciation in an abusive manner. As a result of the tax law changes in 1986, tax rates were lowered substantially but many tax reduction techniques (such as component depreciation) were eliminated.
From 1987 to 1996, there was a limited ability to depreciate any portion of a real estate separately. Some owners and tax practitioners experimented with assertions that portions of the cost basis were personal property (Section 1245) and not real estate (Section 1250).
The case for differentiating between personal property and real estate was HCA (Hospital Corporation of America). After this case was determined in 1996, the IRS decided not to appeal it. Depreciating real estate offered more potential for tax deductions and tax reductions.
The following is a summary of some of the items prescribed and the depreciable life in years:
Carpet 5 years Vinyl Tile 5 years Interior Signage 7 years Parking Lot Striping 7 years Paving 15 years Landscaping 15 years Sidewalks 15 years
The IRS has summarized their portion on cost segregation and its practice in the Audit Techniques Guide. While many real estate investors and tax practitioners are unfamiliar with the tax reduction benefits from using cost segregation, the IRS reports it is appropriate as the most accurate method to depreciate real estate.
Cost segregation produces tax deductions and reduces federal income taxes across the country and in every size market. Below are just a few examples of where cost segregation generates meaningful tax deductions.
Baltimore, MD Atlanta, GA Miami, FL Los Angeles, CA Memphis, TN Las Vegas, NV Washington, DC Philadelphia, PA New York, NY Dallas/Ft. Worth, TX Grand Rapids, MI Detroit, MI Rochester, NY Greensboro, NC Fresno, CA Cincinnati, OH Columbus, OH Allentown, PA Oklahoma City, OK Dayton, OH St. Louis, MO Indianapolis, IN Birmingham, AL Charleston, SC Louisville, KY Lancaster, PA Riverside, CA Scranton, PA Madison, WI Chattanooga, TN
Cost segregation produces tax deductions for virtually all property types.
Daycare center School Bowling alley Drugstore Office warehouse Racket club Car wash facility Auto dealer Auto salvage yard Skating rink
Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.
Furniture stores Day care facilities Nondurable good wholesalers Wood product manufacturing Building supply dealers Laundry facilities Chemical manufacturing Apparel manufacturing Automotive repair facilities Food and beverage stores
O’Connor & Associates is a national provider of commercial real estate consulting services including cost segregation studies, tax reduction, due diligence, renovation upgrading cost analyses, Dallas federal tax reduction, tax return review and apartment inspections.
About the Author
Patrick C. O’Connor has been president of O’Connor & Associates since 1983 and is a recipient of the prestigious MAI designation from the Appraisal Institute. He is also an registered senior property tax consultant in the state of Texas and has written numerous articles in state and national publications on reducing property taxes. He continues to set the standard in direction and quality of our appraisal products, adding services ranging from business valuations and business appraisals to cost segregation analysis for income tax reduction.