Cost Segregation Case Study
The best way to illustrate the direct financial benefits of a Cost Segregation Study is through the following KBKG case study:
What is a Cost Segregation Study & How Does it Work?
When a property is purchased, not only does it include a building structure, but it also includes all of its interior and exterior components. On average, 20% to 40% of those components fall into tax categories that can be written off much quicker than the building structure. A Cost Segregation study dissects the construction cost or purchase price of the property that would otherwise be depreciated over 27 ½ or 39 years. The primary goal of a Cost Segregation study is to identify all property-related costs that can be depreciated over 5, 7 and 15 years. For example, certain electrical outlets that are dedicated to equipment such as appliances or computers should be depreciated over 5 years.
KBKG goes beyond a traditional Cost Segregation study and will also separate all of the different building structural components (such as the roof, windows or HVAC units) so when they are replaced, a loss deduction can be claimed on them. For leased property, we also separate tenant leasehold improvements.
Cost Segregation of an Apartment Building Construction
A taxpayer completes a $5 million construction of an apartment building. $500,000 of the construction costs are initially identified by the taxpayer as furniture and equipment related (i.e. stoves, dishwashers and other appliances). The remaining $4.5 million of project costs are classified as building real property and depreciated over a 27.5-year class life by the taxpayer. The taxpayer appropriately decides to conduct a Cost Segregation Study in the tax year the project was completed and placed-into-service.
After the thorough analysis of the $4.5 million building real property by a Certified Cost Segregation Specialist, certain costs are identified as tangible personal property and land improvements. The results of the analysis are as follows:
- 17% of the $4.5 million identified as personal property (5-year depreciable class life)
- 8% of the $4.5 million identified as land improvements (15-year depreciable class life)
- 75% of the $4.5 million remains as structural real property (27.5-year depreciable class life)
Tax Benefits & Present Value Savings as a Result of the Cost Segregation:
The following chart depicts the difference between total depreciation deductions of the apartment building for the first five years with and without a Cost Segregation Study:
Depending on when this building was placed in service, bonus depreciation rules may further accelerate the timing of these deductions.
The potential tax saving benefits derived from a Cost Segregation Study can be significant based on the cost basis of the project and type of property. Typically capital improvement projects larger than $500,000 or greater can benefit from cost segregation.
» Download the Cost Segregation present value savings analysis for an apartment building
Cost Segregation Case Study by Building Type
Do You Qualify for a Cost Segregation?
KBKG can help you identify if you are an ideal candidate for this and other lucrative studies.
Cost Segregation Tax Insights
KBKG Promotes Amar Patel to Principal of Cost Segregation
PASADENA, Calif. – KBKG, a tax credits and incentives consulting firm, has announced the promotion of Amar Patel to Principal of Cost Segregation. Patel is based out of the firm’s Southeast office and most recently spent the past two years as the Director of Cost Segregation. “Amar and I have known each other our entire … Read More
This Month’s Webinars
Looking for CPE credit? We have several sessions available this month. Click the links below to register. If you have questions or need help registering, please email [email protected] Research & Development Tax Credits 11/1/2022 | 12:00 PM PT | 1 hour | 1 CPE credit This webinar will cover the fundamentals of the Research and … Read More
KBKG to Exhibit AFWA Women Who Count Conference
Attending the AFWA Women Who Count Conference is Principal, Lester Cook, Manager, Sasha Brenecki, and Regional Director Todd French who will represent KBKG at the event, which takes place October 25th-28th in Chicago, Illinois at The Drake. About the Event This is the first time in two years that the AFWA will host its annual … Read More
KBKG to Exhibit and Sponsor Tal Glenn Memorial Golf Tournament
Attending the 2022 Tal Glenn Memorial Golf Tournament is our Principal, Eddie Price, and our Regional Director, Matthew Geltz, who will represent KBKG at the event, which takes place on October 24th in Tyler, Texas at The Cascades Golf & Country Club. About the Event The Tal Glenn Memorial Golf Tournament is an annual golf … Read More
KBKG Tax Insight: IRS Updates Audit Technique Guide for Cost Segregation
IRS Updates Audit Technique Guide for Cost Segregation On June 1st of, 2022, the IRS published the latest edition of the Cost Segregation Audit Technique Guide (ATG). The Cost Segregation ATG assists IRS examiners during audits by providing an understanding of technical information, examination techniques, and what to look for when reviewing cost segregation reports. … Read More
KBKG to Speak and Exhibit at FICPA MEGA CPE Conference
Research & Development Tax Credit Principal, Jonathan Tucker and Director, Ian Williams will be speaking on Research and Development Tax Credits Overview and Recent Updates. Their presentation is taking place on Thursday, June 9th from 10:30 AM – 11:20 AM. Regional Director, Chad Niehaus is speaking in a 25-minute Ted-Talk, a new way of presenting … Read More
KBKG to Exhibit and Sponsor the NJCPA Convention & Expo
This year, Sumit Sharma, Paul McVoy, Alexis McClellan, and Justin Brumfield will be representing KBKG at the NJCPA Convention & Expo. This conference takes place from June 14th to June 17th at NJCPA Convention & Expo in Atlantic City. About the NJCPA Convention & Expo The NJCPA Convention & Expo knows that there are mega-changes … Read More
KBKG Tax Insight: IRS and Treasury Release Rev. Proc. 2022-14 Earlier This Year
The IRS and Treasury released Rev. Proc. 2022-14 earlier this year, updating and superseding the current list of automatic method changes. Background Taxpayers generally cannot change from an established accounting method to a different method unless they first obtain IRS consent to change from the established accounting method. Taxpayers must obtain IRS consent to change … Read More
KBKG Tax Insight: Pull Tax-Free Cash Out of 1031 Exchanges with Cost Segregation
As featured in Accounting Today Real estate owners have limited options to pull cash out of a 1031 exchange without having to pay income tax. With proper tax planning, this problem can be solved with a cost segregation study. The application of cost segregation for this purpose may vary depending on the tax rules in … Read More
KBKG to Speak at TXCPA Dallas Convergence 2022
Alex Martin, Transfer Pricing Principal, will be speaking at TXCPA Dallas Convergence on Monday, May 16th. He’ll be joined by Bill Taylor, William Long, Matthew Geltz, Mike Cornell, and Emily Kennedy from our Dallas Fort-Worth office. This event is taking place at the Omni Frisco Hotel in Frisco, Texas. About the TXCPA Dallas Convergence TXCPA … Read More