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August 16, 2016

Cost Segregation Studies Reduce Tax Liability by Accelerating Depreciation Deductions

Whether you have built, remodeled or purchased real estate in the past few years, there may be a way to significantly reduce your federal and state tax liability through a qualified cost segregation study. By accelerating the timing of the depreciation deductions, taxpayers see an immediate increase in cash flow.  In addition, since bonus depreciation will begin phasing out in 2018 and expire completely after 2019, now is the time to take advantage of the new PATH Act provisions and act on this important tax saving tool.

Here are a few different client examples of cost segregation study success:

Office Building
An office building was constructed from the ground up at a total cost of $3.3 million.  As a result of a cost segregation study, nearly $731,000 of costs were re-categorized from 39-year property to 5, 7 and 15 year property.  This resulted in an additional first year depreciation deduction of over $400,000!

Auto Dealer
Our client, an auto dealer, purchased a commercial building for $1.6 million and incurred $1.5 million in renovation costs in 2014. After a qualified cost segregation study was completed, over $1.4 million of assets were broken down into 5-, 7- and 15-year MACRS property.  The net present value (the cumulative value of accelerated tax savings) of completing the cost segregation study was over $273,000!

Commercial Building
After purchasing a commercial building and incurring renovation costs totaling $7.6 million during 2008 and 2009, our client decided to do a look back cost segregation study and “catch-up” on depreciation deductions the 2015 tax return. Over $3.6 million of assets were broken down into shorter lived assets. The net present value of the study was nearly $355,000!

Assisted Living Facility
A new assisted living facility was built at a total cost near $5.8 million.  After our client engaged us to complete a cost segregation study, roughly 40% of the costs ($2.4 million) were eligible for bonus depreciation and accelerated depreciation.  The net present value over the life of the project was over $432,000!

Golf Course
Our client purchased a golf course for $6.7 million in 2013.  Due to complex depreciation rules surrounding golf courses, and to ensure they weren’t leaving deductions on the table, our client decided to perform a cost segregation study on the purchase. During the study, it was determined that the tees and greens were up to USGA standards and therefore we could treat what otherwise would be non-depreciable land as depreciation property. The net present value of the study was over $309,000!

Will a cost segregation study work for me?
First, we at Anders will want to have a meeting to discuss if a cost segregation study will work for you, your investors and your entity.  Often times, the most recent tax return and depreciation schedule will get us started on that path.

Second, after qualifying that a cost segregation may work in your situation, we will want to gather the following information:

  • Current set of architectural plans (if available)
  • Cost of Building (Schedule of Values, project budget or purchase price)
  • Square feet of building, number of floors and site size (in acres)
  • Details on usage of building (i.e. office space, warehouse, etc.)

After that information is gathered, we will analyze the information and come up with an approximate net present value of the tax benefits derived from the cost segregation study, as well as the cost. We want to work with you to make sure that you are comfortable with the cost benefit analysis of moving forward with the study.

Cost segregation studies have helped many of our clients reduce their current tax liabilities through the timing of the depreciation deduction on what is often their largest asset. If you have any questions on how your real estate or construction investments can benefit from a qualified cost segregation study, contact Anders.

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