Cost Segregation - Pay Yourself or the IRS?

Owners of commercial property and/or leasehold improvements can now legally redirect their Federal and State tax dollars back to their business. The alternative is to give your money to Uncle Sam to be managed...YIKES!! This process, known as cost segregation (A.K.A. cost seg or accelerated depreciation), is available to commercial property owners with holdings over $200k.

Cost seg is an IRS approved tax strategy allowing owners of commercial property to increase their cash flow and decrease their tax liability. A comprehensive study frontloads depreciation deductions into the early years of ownership, thus capitalizing on the time value of money.

A deduction today is always going to be worth more than that same deduction five or ten years from now.

Cost seg is the process of identifying, separating, and reclassifying costs in a commercial building from 39 year (or 27.5 year) property to 5, 7 and 15 year property.

• For example: The carpeting in a commercial building can be reclassified from 39 year property to 5 year property using cost segregation.

In general, an engineer based study can yield a tax savings of 8%-12% of the cost of any given property. A one million dollar property could yield a tax benefit of $100,000 or more.

So why isn't every owner of commercial property utilizing this tax strategy?

Many property owners are simply unaware of this tax strategy. Every year, thousands of commercial property owners overpay their taxes. Oh, and chances are your accountant is NOT "already doing that for you". A proper cost seg study is comprised of tax law/knowledge and engineering principles (cost estimating, construction, and blueprint comprehension). Most accounting firms do not specialize in this area; however, a good cost segregation company will work hand in hand with the property owner's accounting firm to make the final application of the study a turn key solution. A completed cost segregation study does not replace the important role an accountant plays in preparing tax documentation or determining tax liability.

Who qualifies for a cost segregation study?

Any property owner who has:

• Purchased or constructed a commercial building or facility after 1986


• Renovated, remodeled, expanded or restored an existing facility


• Paid for office or facility leasehold improvements


• Purchased commercial residential property such as an apartment complex/building

Cost segregation can benefit owners of apartment complexes, assisted living facilities, auto dealerships, banks, casinos, car washes, fitness centers, gas stations, grocery stores, hospitals, hotels, medical facilities (doctors, dentists, etc.), office buildings, storage facilities, restaurants, retail centers and more.

Think of the benefits of cost segregation this way: If you were given a check for a million dollars and had to choose to either cash it now or in 39 years, what would you do? Well, most people would cash it now, because the time value of that money is worth more today than 39 years from now. This is the same idea with cost segregation.

By not doing a cost segregation study, commercial property owners are basically giving the IRS an interest free loan of money they could be using TODAY for their own benefit! They could pay down debt, purchase more property, invest it, or take a vacation. Educate yourself on this tax strategy.