The Real Estate Encyclopedia
What is Cost Segregation?
Category - Real Estate Information Sources - General Real Estate Information
Cost Segregation is a strategic tax savings tool that allows companies and individuals, who have constructed, purchased, expanded, or remodeled any kind of real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes.

Any business that has recently acquired improved real estate, or constructed new improvements, can likely reduce its taxable income for several years by segregating the property by type and depreciation rate. A cost segregation analysis identifies and segregates assets that qualify as tangible personal property, other tangible property, land improvements and real property.

Most businesses, when they buy or construct a facility, depreciate the improvements over thirty-nine years using a straight-line depreciation method. Cost segregation identifies assets that qualify for five, seven or fifteen year depreciation lives and accelerated depreciation methods, and establishes their cost. The result is increased non-cash expenses reported in the short term, reducing taxable income and tax liability.

Cost segregation does not eliminate taxes owed, but can defer them until later years, resulting in a significant savings today. The after-tax savings is commonly as much as twenty to fifty times the price of the cost segregation study. Today every $1,000,000 worth of property reclassified as a five-year property has a present value of $200,000. The steps required to accomplish this include a detailed identification of a facility's components; the appropriate classification of each component, or property unit, for tax purposes; and determination of the cost of each unit.

A good cost segregation specialist should have the expertise in construction, engineering, construction cost estimating, tax regulations and court cases to perform cost segregation studies for any business from a single bank to a multinational corporation with facilities on several continents. If those studies are ever challenged, you should count on your cost segregation specialist to give expert testimony to support his conclusions before regulators and the courts.


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