The Cost Segregation Study Process
for Achieving Real Estate Investment Tax Benefits
Copyright © 2006 Casey Moher
If you are among the millions of people taking advantage of real estate
investing, then you may have overlooked one of the most simple and
practical ways to take advantage of your ownership. Real estate
investors and owners can greatly benefit from using cost segregation
studies in order to accelerate the overall property depreciation. This
may sound baffling at first glance, but when you realize the dramatic
current income tax benefit, the advantages become much clearer.
You can use this tax benefit if you have an investment property in one
of the following categories:
- Commercial
- Industrial
- Multi-family
- Special purpose real estate Generally speaking, the tax benefits
increase with the specialization and cost of the property.
Unfortunately, these benefits are neither utilized nor maximized by
real estate owners as all too many of them fail to have a cost
segregation study performed on their investment.
What is this magical, advantageous cost segregation study, you ask?
Good question. A cost segregation study (sometimes referred to as
CSS) is an analysis performed on a property in order to determine
the total cost or value of a building on a property, as well as any
site improvements that have been made. These studies rarely include
either an analysis of any actual land value, or the contents of the
building, such as fixtures, furniture, and equipment.
A CSS looks into the allotment of value or cost among each of the
different elements of the building itself as well as the site
improvements, in a way that recognizes certain federal tax
depreciable life categories. In order to reach an optimal level for
the reclassification from a longer to a shorter lifespan, a detailed
CSS analysis of a property is necessary. This CSS is performed by
qualified engineers and appraisers and accountants.
Only by understanding certain tax guidelines and regulations, as
well as tax court cases, revenue rulings, and other current and
relevant legislation issues, is an appraiser capable of accurately
performing a cost segregation study.
If you are a taxpayer who has acquired a property, constructed a
building, expanded on a facility, or otherwise changed the tax basis
of their real estate ownership or investment property, then you
qualify for using a CSS and enjoy the benefits it can offer you. You
may also perform a CSS if you have a property that has been
constructed or acquired in the past ten years, if it had not been
performed at the initial time that the property was placed in
service.
Typically, the methodology of CSS requires that the person (or
people) performing the study must develop a completed and detailed
comprehension regarding the entire cost or value of the real estate
investment so that it may be analyzed at the level of total
depreciation for taxes. In order to accomplish this, a detailed
accounting of the cost of the land itself, as well as any site
improvements, structures, and equipment in use on the property must
be provided. In the case of a new construction, additional details
are required regarding the direct and indirect costs. What is the
difference between these costs?
Direct costs are those paid for labor and materials in order for the
structure to be built. Indirect costs, on the other hand, are those
paid so that the project may occur, but that are not directly
relevant to the actual labor and materials going into the
construction. Indirect costs will usually be allocated to direct
costs on a pro rata basis.
The next step is the inspection of your property in order to
completely understand the function, nature, and operation of each of
its elements. At this time, the appraiser will also confirm the
accuracy of any documents that have been created or submitted about
the property. This is an essential step in the process as it allows
for the identification of the exact property classifications
associated with the depreciable federal tax lives. The property
units are established by asset function.
The most involved and important stage of the CSS is the precise
identification and quantification of the asset components qualifying
for 5-year, 7-year, or 15-year depreciable tax lives. Frequently, in
the case of a recently constructed property, detailed information
regarding the construction costs can provide a breakdown of the
different costs incurred. The CSS will analyze and supplement this
information with “quantity take-off estimates” which allow for
the further reclassification of more of the property into a shorter
tax life.
Lastly, the analyst must then document and report what has been
found throughout the rest of the CSS process. This usually means
that the process of identification and quantification will need to
be supported with additional documentation and calculations.
Generally, these will be referenced using an automated
computer-based report specifically for cost segregations.
The report that is produced allows for the full description of the
property, as well as the different efforts made in order to conclude
on the quantification and the property life, as well as the
supporting data. All of the procedures of analysis requiring
continual, logical, and supportable reporting are provided. Other
related and supporting calculations from different portions of the
process will also be included in the report.
Finally, a cost segregation study, when conducted well, will always
include a detailed, referenced work-paper file. Its purpose is the
support all of the final conclusions that have been made by the CSS.
This also allows for an audit trail. Should additional, similar
property portfolios exist, a sampling methodology may be utilized in
order to support the analysis that has been made.
By having a cost segregation study done at the right times
throughout the ownership of your real estate investment, you can
take advantage of a substantial tax advantage that is well worth
your while.
About The Author:
Written by: Casey Moher
- http://www.CashRetrievalSystems.com
Casey's company has formed alliances and partnerships with a
few very specialized and well-established professionals who
are really good at locating and retrieving overpaid CASH on
behalf of commercial property owners in America. There is a
need for people in your area right now to refer businesses for
his team of experts to review. If you would like to locate
businesses in your area for submission to these experts, you
can earn substantial amounts of cash! Learn more: http://www.cashretrievalsystems.com |
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