Cost Segregation
For those owners who purchased a property since 1987, they can have part of their building deprecation accelerated from 39 years (for commercial buildings) and 29 years (for apartment buildings) to 5, 7, and 15 years. This provides owners a legal windfall tax benefit for which they can use to purchase other properties. For this to work, you need to be already paying federal income taxes and looking to keep the property for at least 1-3 years. This applies to all commericial real estate including hotels, medical building, manufacturing, etc. This will Not apply to non- profit organizations. An example is an office building purchased for 15 million who received a tax benefit of $1,500,000 (he was in a 40% tax bracket). Some of the building components (carpeting for example) can be considered personal property and classified as a 5 year property. This means that you can segregate the carpeting ( as well as other parts of the building)and depreciate it over 5 years instead of 39 years. Most accountants are not yet aware of this benefit as there has been new case law and IRS regulations. Even if the accountants become aware of this, they cannot offer it to their clients since most of them do not have the resources to do this. The IRS requires an engineer to do a detailed and comprehensive cost segregation analysis. There are some companies out there that are performing only "residual studies" which can run into many problems for the owners. By the way, doing this will not raise a red flag as you will be only changing accounting methods and there is no need to file an amended return.
By the way, this can also apply to tenants who have spent over $500,000 in tenants leasehold improvements or betterments.
Great info. I recently heard about this, too.
But I have a question for you. Specifically what type of engineer would do the proper sort of cost segregation?
Thanks!
An engineer that is familiar with building construction and the IRS regulations. The IRS has very strict requirements about the kind of study they will accept. We are in this business and get provide an initial analysis of the kind of tax benefit you can obtain and our fee . If you or anyone else are interested, let us know.