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.
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
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KBKG Tax Insight: Qualified Improvements, Bonus Depreciation, and 179 By John Manolos | Senior Manager – Cost Segregation With the passage of the CARES Act on March 27, 2020, Congress addressed the much anticipated “Retail Glitch” associated with the 2017 Tax Cuts and Jobs Act (TCJA). This rule previously prevented investments in qualified improvement property … Read More
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