Myth: My accountant already makes sure I get all allowable depreciation.

Reality:

As we all know, IRS rules and regulations are extremely complex. Cost segregation involves not only specialized tax law knowledge but construction engineering expertise such as the ability to read blueprints and building specifications. Even if your accountant understands the basics of cost segregation, without contractor/engineer expertise and a deep understanding of the relevant tax law changes, IRS Private Letter Rulings and court cases, valuable tax benefits will certainly be missed. IRS cost segregation audit guidelines clearly state that “a study by a construction engineer is more reliable than one conducted by someone with no engineering or construction background.

 

If your accountant is currently using the straight-line method of depreciation, it is highly likely that anywhere from 15% to 50% of building components can be reclassified to shorter depreciable lives, resulting in significant tax savings. On buildings where the owner has made substantial renovations, 90% of the costs could potentially qualify for accelerated depreciation, even where the building has been fully depreciated.

Myth: A study costs more money and hassle than it is worth.

Reality:

In the early days of cost segregation this might have been true, especially for owners of smaller buildings. However, experience and new methodology have brought costs within reach of the vast majority of property owners. Further, the time and effort involved on the part of building owners or managers is minimal. And the savings can be substantial for any owner who pays federal income taxes. Savings generally range from 35% to 46% of the additional depreciation generated from the study.

Myth: It's too late to change our depreciation method.

Reality:

Many owners and their accountants think that once they have established an accounting method, they are locked into that way of depreciating their building. This myth keeps many owners from realizing one of the key advantages of cost segregation. For the perspective of the IRS, an owner who applies cost segregation is changing from an incorrect method, straight line, to a correct method, component depreciation. Not only is this change in method permitted, approval is automatic once a qualified cost segregation study has been performed and the building owner has completed and submitted an IRS form 3115. What’s more, IRS rules allow you to realize all of the depreciation adjustment for prior years in the year the study is completed, which can mean an immediate and significant increase in cash flow.

Myth: Doing a cost segregation study will trigger an audit.

Reality:

More than 200 IRS rulings, procedures and court cases have upheld the validity of cost segregation studies. Also, the IRS has published detailed audit guidelines and field directives for performing and documenting studies. US Tax Advisors Group, Inc. has completed thousands of studies without a single successful challenge from the IRS. In the unlikely event of an IRS challenge, US Tax Advisors Group, Inc. will provide one of our engineers, at our expense, to defend every aspect of any study we complete.

Myth: A cost segregation study makes sense only for large commercial properties.

Reality:

Using a cost-effective approach, and depending on the type of property, a cost segregation study can be a worthwhile investment for properties with values as low as $30,000.

Myth: Doing a cost segregation study means I'll owe more tax when I sell.

Reality:

Not necessarily. In many cases a 1031 exchange can be a viable option for owners planning to sell in the short term who still want to take advantage of cost segregation. Even if you do recapture the depreciation when you sell, you are gaining the use of that money now. In essence, performing a cost segregation study entitles you to a long-term interest-free loan from the federal government. In most cases, the net present value of the tax savings provides a substantial return over the relatively modest cost of a study. Also, in most cases the personal property components will depreciate in actual value, so their value at the time of sale will be close to their depreciation cost basis. Thus, more of the sale gain will be allocated to real estate rather than personal property and taxed at the lower capital gains rate.

Myth: Doing a study means I will have to amend my past year returns.

Reality:

No! Section 2.01 of the Appendix of Revenue Procedure 2002-9 allows an automatic change of accounting method without amending past returns. At no additional charge, USTAGI will provide you with the 481(a) adjustments showing the depreciation calculations needed to complete the form 3115.

Myth: It doesn't matter who performs a cost segregation study.

Reality:

Actually, it matters a great deal. Because there is no “bright line” test for determining what items can be included in a cost segregation study, study levels can vary widely with corresponding variations in both cost and tax savings. A cost segregation study done at 10,000 feet by an accountant with no engineering or construction cost-estimating background might identify a few items, such as carpet or a parking lot, that qualify for accelerated depreciation. It is extremely unlikely, however, that this approach will identify more than a small fraction of what an owner is entitled to. More importantly, this methodology will not withstand IRS scrutiny.
As an example, an engineered cost segregation study on a $1,000,000 building should result in $150,000 to $500,000 of the components being accelerated, providing actual tax savings that could range anywhere from $87,500 to $230,000. Identifying all of the building items that can legitimately be accelerated requires specialized construction and engineering expertise combined with in-depth knowledge of the tax laws, IRS rules and court cases governing cost segregation studies. This is a key reason to choose a highly experienced team such as the one available with US Tax Advisors Group, Inc.

Myth: I will get the deduction in the future regardless.

Reality:

Basic economics tells us that a deduction today is worth more than a deduction in the future. The tax savings generated by a cost segregation study is opportunity capital that is available to invest today. In essence, you are getting a long-term no-interest loan from the federal government to do with as you see fit. By contrast, not engaging a study means giving up all of the gain that could be realized from these investments. Also, depending on the age of the owner, a 39-year timeframe for all the depreciation may not be realistic.

Myth: Cost segregation will complicate estate planning.

Reality:

Applying a cost segregation study may be one of the most lucrative strategies available in estate planning today. By employing step up in basis rules, both the current owner AND the future estate can take advantage of accelerated depreciation. Since the core purpose of estate planning is to maximize the future value and use of an estate, estate planning professionals who do not consider cost segregation are doing their clients a disservice.

WE OFFER TWO TYPES OF COST SEGREGATION SERVICES

1. FULL ENGINEERED COST SEGREGATION

For buildings with a basis or value (after deducting the land value) over $500,000, we perform a Full Engineering Based Cost Segregation Study. This type of study requires the property to be inspected and documented: all data must be components, categorized, measured, assigned values and photographed. A qualified engineer will take all property data compiled a study meant to withstand IRS questions and scrutiny. We do this following the highest level of methodology as dictated by the Cost Segregation Audit Technique Guidelines published by the IRS

2. MODELING COST SEGREGATION

A new, affordable option to accelerate depreciation is available. If you have a building where the land has already been carved out, and the building basis is less than $500k, we can Model a Cost Seg benefit very inexpensively.

 

Despite popular belief – it doesn’t matter what kind of building it is.

Is the Modeling Method for you?

How Does It Work?

With the Modeling Method, we can eliminate all three components of the scope, and leverage our extensive Cost Seg database and statistical modeling tools. By doing this – we can determine an accelerated depreciation model which can get you the tax savings without having to go to the field, run the cost estimating, or implement the legal analysis.

Audit Compliant?

Although the Modeling Method meets the requirements under the IRS audit guidelines for Cost Segregation; and is not an engineering study, it will get you very close to an engineering-based study, without the high costs and fees. If you are audited in the future, we will stand by and defend the Modeling Method used because statistically our numbers are going to be right where they need to be. We provide audit support at no extra cost except for any travel, which is highly unlikely.

How Much?

If you want to do a modeling calculation on a project that qualifies – we charge a flat fee (less than $999) based on the number of buildings, the location (address), the type and major characteristics (size, stories, number of beds/baths, etc.). We do it all inside modeling software: it’s very efficient and gets you the benefit without the level of effort and the cost. To get started – call or email and we will run a benefit estimate to see if you qualify.

Complimentary Estimate and Analysis.

With USTAGI you receive a review and analysis at no extra charge. Our professional engineers will work with the building owner and his tax advisors to see how we can best lower income taxes to create additional cash flow. Fill out the no cost Cost Segregation Estiamte Intake Form and we will evaluate your building.