Who Can Benefit from a Cost Segregation Study?

Minimum Requirements

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

Whether the property qualifies for a study
The tax status of the owner or leaseholder

Property Qualification

The types of property that can potentially benefit from a cost segregation study are numerous. They include manufacturing facilities, retail stores, office buildings, restaurants, apartment buildings, warehouses and storage facilities, hotels, automotive repair shops, dealerships, and more—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 1986 (including leasehold improvements), or be new construction
Be defined as property for a commercial investment purpose

Tax Status

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, including but not limited to:

C Corp
S Corp
Individual
Partnership
LLC

Nonprofit entities and owners of property purchased before 1986 cannot take advantage of a cost segregation study.

Practical Considerations

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

The owner’s tax position
The total value of building components that can be accelerated
The cost of a study
How long the property will be held

Tax Position

The first variable to consider is the current, past and future tax position of the owner. 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 two years ago or will be over the next few years.

How Much Can Be Accelerated

The second variable is the percentage of property that qualifies for accelerated depreciation and the resultant deduction. Because every situation is unique, the fastest way to determine how your potential savings is to acquire a preliminary property analysis. Available at no cost or obligation, 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 advisors key information needed to make an informed decision.

The value of a preliminary analysis cannot be overstated. The analysis takes into consideration factors such as property cost, construction type, how long the property has already been depreciated and other relevant items that can affect the outcome of a study. We can generally turn around a preliminary analysis within 72 hours of receiving basic information about the property.

Because these are conservative estimates based on years of experience and thousands of completed studies, our clients commonly use them to reduce estimated quarterly payments prior to the completion of a final study.

Study Cost

The third 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. Cost Segregation Services, Inc. provides a fixed fee proposal with each preliminary property analysis. And because cost segregation is all we do, we are able to offer our services at a cost that truly makes sense.

Period of Ownership

The fourth 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 three years it may 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.