Cost Segregation 101

If you aren't familiar with Cost Segregation Studies, you've come to the right place. Below, we've provided a selection of information on what Cost Segregation Studies are, how they're done, and what they can do.

What is a Cost Segregation Study?

A cost segregation study allows real estate owners to break down the capitalized costs of their buildings and identify building costs that would normally be depreciated over a 27 ½- or 39-year period, and instead depreciate them over much shorter periods of time. Non-structural elements of buildings, for example, may be depreciated over five, seven, or fifteen years. It makes sense logically: your carpet isn’t going to last for forty years, why should it depreciate over that period of time?

Why Should You Consider Cost Segregation?

Cost segregation works upon the same principle as most other sound tax planning: by decreasing current income and thereby deferring taxes to a later tax period, you can gain financially due to the time value of money. Put as simply as possible, a tax deduction today is worth more than a tax deduction next year, and worth a great deal more than a tax deduction thirty years from now.

What Does Cost Segregation Mean for Me?

If you or your client own substantial commercial real estate, it could mean hundreds of thousands—if not millions—of dollars in tax deferments. It means a substantial influx in available cash thanks to decreased tax burden: while deferred tax will have to be paid in later years, this essentially amounts to an interest-free loan against money that will need to be paid regardless.

Additionally, the law allows property owners to capture depreciation retroactively, as far back as 1987, providing the opportunity for even more substantial tax benefits.

Finally, a cost segregation study—particularly the rigorous, engineering-based study conducted by MS Consultants—provides a clear set of documentation in the case of an audit. Improper cost and asset documentation can cause all sorts of headaches: with the sort of thorough, quality report prepared by MS Consultants, any IRS inquiries can be resolved at the earliest stages.

How Can I Learn More?

You can check out our page exploring the IRS’s Cost Segregation Audit Techniques Guide, you can get a rough estimate of what a cost segregation study might do for you by checking out our Cost Segregation Calculator, or you can contact one of our consultants with any questions you have, and find out how you or your clients can benefit from working with MS Consultants.