Cost Segregation and Allocation for Mixed-Used Properties: What You Need To Know

Seasoned tax professionals and CPAs understand the importance of cost segregation real estate studies. Mixed-use buildings present notable tax complexities, especially with applicable IRS regulations. A Certified Cost Segregation Professional (CCSP) can help with navigating these complexities. A condo tax basis allocation and cost segregation can help maximize tax benefits for your clients.

Identifying Tax Challenges With Mixed-Use Properties

Many vertical mixed-use buildings stack residential condos on top of commercial spaces. As such, these buildings create interesting tax complexities. Identifying and allocating different asset types to appropriate depreciation schedules can be challenging. Key difficulties with mixed-use properties involve deciphering and detailing certain expenses. Some construction trade costs are lumped together, yet they apply to multiple sections of the property. These usually include building structures, elevators, site improvements, and roofs.

Without an engineering analysis of blueprints and specifications, determining how to allocate costs in a mixed-use structure can be extremely difficult. Yet a lack of appropriate allocation can result in an understatement of the cost basis for condos in the building. Possible consequences include higher capital gains taxes when owners sell individual units.

Understanding Condo Tax Basis Allocation and Cost Segregation

When conducting a cost segregation analysis for real estate, a CCSP uses engineering and quantitative analysis techniques. Expertise in cost accounting and valuation for construction, architecture, and engineering is critical. Condo tax basis allocation studies involve methods similar to those used in cost segregation studies. Allocation studies can be appropriate for correct cost categorization on mixed-use condominium projects.

What Is Tax Basis Allocation?

When completing a condo tax basis allocation study, a CCSP places building costs into distinct categories. The professional may assign some trade costs based on each section’s measurable qualities, such as square footage, the number of floors, or the number of units. Other costs can be allocated based on their functional usage — for example, a residents-only fitness center. Potential benefits can be significant, especially for projects over $5 million.

What Is Cost Segregation?

Depending on the outcome of a tax allocation study, a cost segregation study for real estate could uncover other depreciation benefits or taxable gains. In a segregation study, a tax professional identifies and assigns costs to their appropriate Modified Accelerated Cost Recovery System tax classifications. The key goal is to discover eligible expenses for depreciation over five-, seven-, and 15-year periods. Typically, between 20% and 40% of building cost components can shift to earlier years of ownership. 

How Do Tax Basis Allocation and Cost Segregation Studies Differ?

While condo tax basis allocation and real estate cost segregation studies are related, they do have slightly different purposes. Completing the former before the latter is highly recommended. As an initial step, an allocation study can correctly define the tax basis for each of the property’s sections. From there, a CCSP can determine which sections, if any, can benefit from the additional analysis of a cost segregation study. 

Getting Help With Tax Basis Allocation and Cost Segregation for Real Estate

KBKG has provided turnkey tax solutions to CPAs and businesses for more than 25 years. Through proven expertise and trusted advice, we have helped clients claim over $1 billion in tax benefits to date. Request a proposal to find out how a condo tax basis allocation and a cost segregation real estate study could benefit your firm.