Owners and lessees of real estate can achieve substantial tax benefits by using a popular asset depreciation technique called cost segregation. Cost segregation is the process of identifying personal property assets and/or tenant improvement costs that may be grouped with real property assets and separating their costs for tax reporting purposes. During a cost segregation study, RIG identifies building costs that are typically depreciated over a 27.5 or 39 year period and reclassifies them into their appropriate asset classification (“asset life”). This reclassification allows for an accelerated depreciation deduction in the current year for these segregated building costs or tenant improvements. For example, costs for non-structural elements such as accent lighting, roofing, wall covering, carpet, portions of the electrical system and external site improvements such as parking lots, sidewalks, and landscaping, can often be depreciated over five, seven, or 15 years rather than over 27.5 or 39 years. This increases the depreciation deduction and lowers taxable income.
Who can take advantage of cost segregation? Any building owner who has purchased, constructed, expanded, or remodeled a building since 1987 or any lessee who has recently paid for tenant improvements. A study is typically cost effective if the purchase or improvements have occurred within the last seven years and the cost is greater than $750,000.
The benefits of cost segregation include the value of front–loaded depreciation deductions, write-offs of building components that need replacement and lower local realty-transfer taxes. Studies can be conducted retroactively for prior costs and purchases resulting in tax refunds. For many clients, the tax benefits can equal up to 10% of the building’s cost or improvements over a five year period.
RIG will review the depreciation schedule and conduct an interview with the client in order to: