What is Cost Segregation?
A cost segregation study proves beneficial in various scenarios, primarily after construction, acquisition, or significant capital improvements, such as leasehold improvements. Moreover, it can be advantageous following a change in ownership, which includes inherited properties or a shift in partnership interest. Additionally, even for buildings already in service, a Look-back study can be performed.
An essential aspect to note is that the IRS allows taxpayers to employ a cost segregation study to adjust depreciation on properties placed in service as far back as January 1, 1987. Despite a common misconception among property owners and tax advisors regarding the three-year statute to amend, the truth is that changes can still be made beyond this timeframe. Taxpayers can take advantage of IRC §481(a) to catch up on depreciation upon completion of the study. The catch-up amount, accumulated over a single year, bridges the gap between the previously depreciated amount and the potential depreciation if the cost segregation study was done from the outset.
The benefits of such an adjustment can be remarkably substantial. What's more, this change doesn't require filing an amended return; instead, taxpayers simply need to submit Form 3115 (Change in Accounting Method).
Who Can Benefit the Most from Cost Segregation?
If you own a building or have made improvements to one since 1987, there is a remarkable opportunity to benefit from a cost segregation study. Even if your building has been in use for the last 5-7 years, you can still take advantage of this strategy. Furthermore, if your property is currently being depreciated over 27.5 or 39 years, cost segregation can significantly enhance your financial position. To determine if cost segregation is right for you, a good rule of thumb is to consider it if your capitalized costs exceed $1,000,000.
A variety of property types can reap substantial rewards from cost segregation. Whether it's an apartment complex, auto dealership, bank, casino, distribution center, grocery store, healthcare facility, hotel, manufacturing facility, nursing home, office building, restaurant, shopping center, sports facility, warehouse, or specialized property, there are numerous opportunities. Generally, more complex buildings yield the greatest benefits through a cost segregation study. It's essential to keep in mind that to take advantage of cost segregation, the property owner must be a tax-paying entity.
Using Cost Segregation for Estate Planning
Contrary to popular misconception, estate planning and cost segregation complement each other rather than being mutually exclusive. By incorporating a cost segregation study (CSS) into the estate planning process, property owners can significantly reduce their tax burden. This approach offers two key benefits: accelerated depreciation and the avoidance of potential recapture, both of which positively impact cash flow.
In traditional tax-planning efforts after the passing of a family member, the focus is often on how assets will be distributed and the resulting impact on heirs. However, valuable opportunities to lower the deceased's final income tax liability can be overlooked. With the utilization of a cost segregation study, it becomes possible to claim previously missed deductions on the final income tax return of the deceased, while also avoiding depreciation recapture that would otherwise be erased due to the basis step-up on death. This, in turn, increases the total estate available to the heirs.
Risks of an IRS Audit with Cost Segregation
Property owners employing cost segregation for new assets (acquisitions or new constructions) face no greater risk of an IRS audit than with any other income tax return. However, the IRS has been scrutinizing cost segregation studies more rigorously, especially those performed by unqualified individuals using abbreviated methodologies. Engaging a qualified professional with an engineering-based approach is crucial to minimize audit risks and ensure compliance with IRS guidelines.
The GOAT.tax Approach
GAt GOAT.tax, building strong relationships is at the heart of our philosophy. We prioritize trust, integrity, and hard work, which have been instrumental in forging enduring partnerships with leading accounting firms, associations, and Fortune 1000 companies across the nation.
Our cost segregation approach is aligned with these principles. Unlike others, we don't compromise your resources by training our team on your projects. Instead, we proudly employ highly experienced cost segregation specialists who bring a wealth of knowledge and skills to each engagement. A vast majority of our team members have a remarkable track record of 10 to 20+ years managing cost segregation projects.
Our in-house cost segregation team is a group of experts from diverse backgrounds, including architects, professional engineers, CPAs, MBAs, and LEED specialists solely dedicated to cost segregation. Moreover, our dedicated management team is actively involved in every project, often conducting site visits themselves—a practice we consider vital to accurately assess properties. This meticulous approach aligns with the IRS's expectations and ensures we deliver exceptional value to our clients.
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