What’s the difference between a formal Cost Segregation study performed by experienced engineers and a Residential Cost Segregator® report?

For most buildings, a Cost Segregation study requires the knowledge of a Certified Cost Segregation Professional (CCSP) with an engineering background. This is because of variations in construction from one building to another as well as varied tax law depending on building types. The engineer physically inspects the property and performs construction quantity takeoffs to account for each building component. Empirical cost data is then used to reconstruct the cost of the entire property. The result is a report with schedules showing values that can be substantiated by the data collected by the engineer.

The Residential Cost Segregator® utilizes many of the same concepts, calculations, and data. Instead of an engineer, the Residential Cost Segregator® relies on data provided by the building owner. So if the building owner indicates the property has carpet in the bedrooms and was acquired with certain appliances, the software accounts for these items. The information provided is processed using KBKG’s proprietary algorithms and empirical data to generate a logical breakdown of costs for each major property component.

The Residential Cost Segregator® is designed specifically for properties too small to hire an experienced CCSP to analyze. Because every property is unique, it may not account for unusual items that exist and generally provides a more conservative allocation than may be available to the taxpayer. The Residential Cost Segregator® is not adequate for use to conduct a Cost Segregation study on larger, more complex properties.

What is Cost Segregation and why should I do it for my rental property?

Cost Segregation is a commonly used strategic tax planning tool that allows building owners who have constructed, purchased, expanded or remodeled real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes.

A Cost Segregation report for residential investment property dissects the purchase price of the property that would otherwise be depreciated over 27.5 years for income tax purposes.

•  Accelerate Depreciation Deductions: The primary goal of Cost Segregation is to identify all property-related costs that can be depreciated faster (typically over 5, 7 and 15 years).

•  Retirement and Partial Disposition Deductions: The secondary goal of Cost Segregation is to establish the depreciable tax value for each major building component that is likely to be replaced in the future. Examples include roof, windows, doors, bathroom fixtures, HVAC, etc. When a component is replaced, taxpayers need this information to claim a “retirement loss” or “partial disposition” deduction for its remaining depreciation.