Cost Segregation

Benefits of a Cost Segregation Study

Definition: Cost segregation is an engineering-based cost analysis of new (or existing) construction for the purpose of maximizing depreciation expense for federal income tax purposes THEREBY increasing current cash flow.

Cost segregation accelerates tax depreciation of construction-related nonstructural elements, such as carpet, wall coverings, accent lighting, and exterior site improvements, such as sidewalks and landscaping.

Example:

$3.1M apartment complex; asset costs were estimated and verified according to industry-recognized valuation techniques and assigned the appropriate depreciable life for federal tax purposes; it was determined that 24% of the total building cost was classified as personal property assets and 8% was classified as land improvement assets; the client saw a tax benefit of approximately $164,000 in the first year; tax benefit over the life of the building is an estimated $189,000.

The concept is to identify those building costs that would typically be depreciated over a 39-year period and reclassify them to permit a shorter, accelerated method of depreciation.

Cost segregation studies are a smart investment for most companies that meet the qualifying criteria. Studies typically pay for themselves seven to 10 times over the life of the asset.