WHO CAN BENEFIT FROM A COST SEGREGATION STUDY?

Minimum Requirements

Two major factors affect the basic feasibility of a cost segregation study:

 

    1. Whether the property qualifies for a study

 

  1. The tax status of the owner or leaseholder

Property Qualification

The types of property that can potentially benefit is unlimited. In short, almost any type of commercial property. At a minimum, to be eligible for a cost segregation study, a property must:

    • Have been purchased or substantially renovated after 2000 (including leasehold improvements), or be new construction

 

    • Be defined as property for investment purpose (not personal residence)

 

  • Can be applied to acquired building basis or cost of improvements or renovations to any leased or rented suites

Practical Considerations

Assuming a property meets the minimum requirements, practical issues come into play. There are three principal variables to consider when evaluating the merits of a study:

The owner’s tax position and status

The owner’s tax position and status

The first variable to consider is the current, past and future tax position of the owner. The first question is, does the owner pay income tax? If the answer is yes, most likely cost segregation will reduce or eliminate the tax bill. An owner who is presently in a high tax position is an obvious candidate. Not so obvious but just as likely to benefit is the owner presently in a low or zero tax position who was in a high tax position over the next few years. Because a cost segregation study creates a tax benefit, the owner must by definition be a taxable entity. Any type of entity that owns real estate and pays tax is a potential candidate for cost segregation.

 

How much can be accelerated

How much can be accelerated

Because every situation is unique, the fastest way to determine how your potential savings is to request a no-cost preliminary property estimate and analysis. Our preliminary analysis will benchmark a specific property against similar properties where studies have been completed. The analysis will yield a conservative estimate of expected savings, giving owners and their advisor’s key information needed to make an informed decision.

 

 

 

The cost of a study

Study Cost

The second variable is the cost of the study. This can significantly affect a study’s value, especially for owners of smaller properties. As an example, if an owner can expect a $50,000 savings from a cost segregation study, but the study costs $12,500, the effective opportunity cost is 25% and the study’s value is questionable. On the other hand, a study that generates the same savings at a cost of $4,000 could be well worth considering. The fee is a deductible expense, which should also be taken into consideration. US Tax Advisors Group, Inc. provides a fixed fee proposal with each preliminary property analysis.

 

How long the property will be held

Period of Ownership

The third variable is the length of time the property will be held. The issue here is one of recapture. Essentially, IRS rules say that any acceleration that an owner takes now will have to be paid back when the property is sold. In the meantime, however, the owner will have use of the additional capital—receiving, in essence, an interest-free loan from the federal government. However, if the period of the “loan” is less than 1 ½ years it will not make sense. In many cases, a 1031 exchange can be a viable option for owners who plan to sell in the short term and want to take advantage of cost segregation.

 

Risks/Downsides

There is no legal or increased audit risk of doing a cost segregation study. Cost segregation is an established, recognized, and proper procedure according to the IRS.

The question, therefore, is actually one of value. Does engaging a study make financial sense? As we said earlier, applying a cost segregation study is like getting an interest-free loan from the state and federal governments, and like any “loan” it will eventually have to be paid back. “Interest-free” does not mean there are no associated costs. If the money you save in taxes will only be used for a short period of time, then a study may be of limited benefit. But if you can use the funds and your effective cost over time is only 1% or 2%, it can make a lot of sense.