Tax Reductions and the IRS Position on Cost Segregation

Tax reductions and tax deductions are a commonLas Vegas, NV
benefit of cost segregation. When real estateHartford, CT
investors and tax practitioners learn about theTampa, FL
income tax deductions and tax reductions resultingBaltimore, MD
from cost segregation they are sometimes skeptical;Allentown, PA
they are concerned it is a tax shelter or tax scheme.Grand Rapids, MI
This simply is not true. Cost Segregation provides aSyracuse, NY
legitimate tax reduction.Lancaster, PA
The IRS has published the Audit Techniques GuideDetroit, MI
(ATG) describing cost segregation and the properSan Diego, CA
methodology to achieve maximum tax reductions.Akron, OH
They report cost segregation is a more accurateNew Haven, CT
method of depreciating real estate (since itEl Paso, TX
establishes a depreciation schedule based on theBuffalo, NY
appropriate life for each component). Depreciation isPalm Bay, FL
a key component in tax reductions.Springfield, MA
Cost segregation is not difficult conceptually. ItManchester, NH
involves separating components of the real estateSan Jose, CA
(such as carpet, vinyl tile, paving, sidewalks andChattanooga, TN
landscaping), which have a shorter economic life andLakeland, FL
depreciate over a shorter period of time. The IRSGreenville, SC
has generally defined which components qualify forRochester, NY
short life depreciation in the ATG. The ATG providesSanta Rosa, CA
a safe harbor for real estate owners who depreciateCincinnati, OH
real estate consistent with its guidelines.Cost segregation produces tax deductions for
While cost segregation is simple in concept, itsvirtually all property types.
application is somewhat arcane. For example: why is aProperty Type:
roof long-life property (39 years for commercialCar wash facility
property) while concrete paving is short-life propertyUsed car lot
(15-year property). Most owners would agree theHotel
paving would outlive the roof. Another example: whyMovie theatre
are removable ceiling tiles long-life property while aMini-warehouse
tree is short-life property (15 years) in most cases.School
The arcane nature of which components can beDiscount store
depreciated over a short-life basis derives partiallyCold storage facility
from the impact of investment tax credit guidelines,Drugstore
which influenced the rules. In addition, court decisionsSelf-storage
and IRS guidelines have created rules that are notAlmost every industry, including the following, can
intuitive. However, for most components, rules havegenerate cost-efficient tax deductions by using cost
been clearly articulated to define their depreciable life.segregation.
These rules and guidelines for methodology in theIndustry:
ATG clearly define the IRS’s position regardingHealth care facilities
cost segregation and benefit from authorized taxGolf courses and country clubs
reductions.Transportation equipment manufacturing
Cost segregation produces tax deductions andPrinting activities
reduces federal income taxes across the country andMineral product manufacturing
in every size market. Below are just a few examplesTextile product mills
of where cost segregation generates meaningful taxTextile mills
deductions.Day care facilities
City:Beverage and tobacco product manufacturing
Boston, MAWarehousing and storage
Washington, DCO’Connor & Associates is a national provider of
San Francisco, CAcommercial real estate consulting services including
Dallas/Ft. Worth, TXcost segregation, due diligence, renovation upgrading
Bridgeport, CTcost analyses, income tax, tax return review and
Orlando, FLapartment inspections.