What is Cost Segregation?

The Internal Revenue Service has stated that when the acquisition of real property is supported by proper supporting documentation (i.e., a specialized cost segregation study prepared by a qualified engineer/appraiser), certain portions of a building and surrounding property can be depreciated over a shorter time than the building itself.

The property owner receives the ability to expense these assets over 5, 7 or 15 year periods, based upon the asset class. These lives are far shorter than the 27 ½ or 39 year lives currently applicable to the building itself and can provide accelerated tax deductions to the property owners. (For every $1 Million of reclassified cost, the net present value after tax benefit can exceed $200,000.00)

This benefit applies primarily to real property acquired after 1986 and must be supported by proper documentation.

A partial list of assets that can potentially be re-classified for residential property includes:

15-Year Property

• Site utilities / drainage
• Parking paving
• Sidewalks and curbing
• Exterior lighting
• Signage and fencing
• Swimming pools. tennis courts, playgrounds, basketball courts

7-Year Property

• Office / clubhouse furnishings
• Indoor sport courts
• Fire extinguishers / emergency lighting
• Alarm systems

5-Year Property

• Carpeting / vinyl tile
• Appliances
• Smoke detectors
• Cabinetry / countertops
• Window treatments

A partial list of assets that can potentially be re-classified for commercial property includes:

15-Year Property

• Site preparation
• Site utilities / drainage
• Parking paving
• Sidewalks and curbing
• Exterior lighting
• Fencing

7-Year Property

• Carpeting / vinyl flooring
• Wallpaper
• Pass-through and observational windows
• Decorative millwork
• Dock equipment

Seven-year property includes property with a class life of 10 years or more but less than 16 years. Fifteen-year property includes property with a class life of 20 years or more but less than 25 years.

Who can benefit from Cost Segregation?

In order to determine if a Cost Segregation Study is appropriate for you, review the following bullet points;

• Purchased or renovated the property in the past 12 years?
• Plan on holding the property for the next few years?
• Cost of the building, less the land exceeds $1M?
• Is your net income currently taxed?

A Cost Segregation Study is a valuable service if you answered yes to any of the questions above.

Contact: For further information contact:

Brad Fountain: bfountain@connorsolutions.com
Direct: 443.322.1237
Mobile: 443.465.4644