If you own commercial real estate, you know that sometimes the tax liabilities can be intimidating. Property taxes alone can be substantial, so property owners often look for different ways to mitigate costs.

One such measure is called cost segregation. Cost segregation allows commercial property owners to classify some elements of their “real” property into personal property or land improvements, thus accruing certain tax benefits.


How Cost Segregation Works

For tax purposes, many commercial buildings are classified as having a 39-year depreciable life at the time of acquisition. By re-classifying parts of the building as personal property through cost segregation, they can instead be classified under an accelerated depreciation schedule—for example, a 5, 7 or 15-year depreciable life.

This can reduce your tax liability, increase your cash flow, and possibly allow you to claim depreciation deductions from previous tax returns. It can make cash readily available now that ordinarily you wouldn’t see for several years.

Most cost segregation companies can also do a land valuation study included with the report to allocate the land properly, instead of using the property tax bills which are usually higher. Cost segregation can also be used to determine asset disposals for larger repairs, a new roof, for example.


How to Produce a Proper Cost Segregation Study

Not anyone can create a cost segregation study. You will need a cost segregations specialist – usually this is a credentialed construction engineer who can provide a detailed analysis of the property and assign a value to each respective part. It is important that your specialist have prior experience in cost segregation and is able to comply with strict IRS guidelines.

This typically includes all the elements—plumbing, electrical, heating and cooling, telecommunications, as well as the floors, walls and ceilings. Usually, one or more of these areas will qualify for the accelerated depreciation schedule.

Along with his or her credentials, your cost segregations specialist must provide impeccable documentation of all the respective values assigned, as well as his or her methodology in reaching those conclusions.


Beware of Audits

It is important that your study be fully credible, documented and executed by credentialed professional. If not, the reliability of the whole study will be in question, and you could be subject to an audit. Make sure your specialist is familiar with tax laws and knows how to be fully IRS compliant to prevent any audits down the road.


Want to Know More About Cost Segregation?

There are many things to be aware of when producing a credentialed and IRS compliant cost segregation study. PDM’s tax experts can help advise you on the best course of action. Contact us; with our years of technical experience, advanced training, and cutting edge technology, we are your financial partner.