O’Connor’s blog series covering, is here to educate and guide you to conduct a successful cost segregation study, as well as the different methodology, requirements compliant with the IRS, and examples dependent on different components. Our cost segregation studies can benefit multiple types of property owners, including hotels, office buildings, retail centers, apartments buildings, warehouses, and retail centers.
What is Cost Segregation?
According to the IRS Cost Segregation Audit Technique Guide, cost segregation is a method of planning your taxes so property or real estate owners can increase their cash flow. Cost segregation, also known as a cost estimating technique, may be required to segregate costs to individual parts of property, such as land, equipment, furniture, etc.
Not only does a cost segregation study increase cash flow, but it also reduces current tax liability, defers federal income taxes, and provides depreciation recapture. Making a choice to do a cost segregation study can also help in keeping you compliant with IRS regulations. The use of cost segregation studies will increase; therefore, it is important to stay informed and prepared.
How does a Cost Segregation Study Work?
Let’s look at an example of a cost segregation study with the purpose of tax benefits. A construction project, regardless of scale, can include tangible property (§1245 property), such as computer and phone systems. In this case, you can allocate or segregate a portion of the project cost to the items. Both small and large businesses can benefit from a cost segregation study. You can find examples of our studies for Apartments, Hotels/Motels, Office Buildings, Shopping Centers, Retail, Drug Stores, Private Schools, Medical/Dental Buildings, and more on our website.
IRS Cost Segregation Audit Technique Guide
The IRS released their own cost segregation guide, Cost Segregation Audit Technique Guide, that goes over the ins and outs of cost segregation techniques, approaches, and elements. The technique guide is meant to help and educate property and real estate owners on the topic of cost segregation studies and how it can help in their property taxes. The technique guide provides a foundation for property owners with the right steps that will expedite the process and minimize any burdens.
To achieve an accurate cost segregation study, the methodology or approach used in distributing project costs to various assets is important. The different approaches mentioned in the technique guide are as follows:
- Survey or Letter Approach
- Residual Estimation Approach
- Sampling or Modeling Approach
- Rule of Thum Approach
- Engineering Approach from Actual Cost Records
- Engineering Cost Estimate Approach