Cost segregation is an engineering-based method of accelerating depreciation on real estate properties by segregating “personal” asset components into shorter life classification. 5, 7 and 15 year property is identified and quantified out of the existing 39 (commercial) or 27.5 (residential) year property.
CSSI is a calculation expert using engineering-based processes to accomplish a beneficial financial application. The company was started in 2003 by Jim Shreve and has done over 15,000 studies nationwide. Jim has the distinction of working with the attorney that won the landmark case for Hospital Corporation of America. After the case, Jim was hired to write the original protocol and procedures to follow in order to bring similar income tax benefits to other property owners. In 2004 the Audit Technique Guideline was published for the tax code.
Greg is a former bank commercial loan officer with in excess of 30 years' experience supporting the financial needs of his clients. He has represented CSSI since February 2010 and currently has done in excess of 525 projects in 32 states saving/deferring in excess of $61,700,000 for property owners.
CSSI is in the source document business. We provide the compliant source document that allows your tax professional to bring you income tax benefits through tax deferral. For an existing property, the benefit is a "catch up" of what has been missed out on for the duration of ownership. This catch up depreciation is brought forward into the current open tax year without amending any past returns! For a new property, our source document allows the tax professional to create the initial depreciation schedule with the best component detail from the beginning.
The accelerated depreciation will reduce your taxable income and allow you to retain the money you would have paid in income tax and use it for a more effective purpose. The typical property owners realized 5-10% of the cost basis in deferred income tax. The benefit will exceed the cost of doing the study multiple times over providing a nice return on investment (ROI). The benefit premise is the time value of money. Our analysis will assist you in calculating the Net Present Value of doing this transaction over the depreciation life of the property.
Acceleration is obtained by reducing the depreciable life such as from 39 years to 5 years. Once the asset has been identified as either a 5 or 7 year asset (personal property that is decorative or has a special purpose) then the tax professional can apply a more aggressive methodology using double declining balance. For the 15 year property (land improvements) such as paving, curbs and gutters, landscaping, drainage, flag poles, light poles, etc., the tax professional can use 150% declining balance. The structural components of the building, building systems and major structural components will be identified and will remain in long-term depreciation (39 years for commercial and 27.5 years for residential). Identification of the components with lives of 20 years or less also facilities Bonus Depreciation and Section 179 when applicable and available to the property – thus another way of accelerating depreciation.
CSSI will provide a preliminary no cost, quantitative analysis that will quantify the benefit and cost effectiveness of doing a study – all without any obligation on your part. Together with CSSI and your tax professional, all the information will be available to make an informed business decision as to move forward or not.
For an existing property provide CSSI a copy of your existing Tax Asset Detail depreciation schedule for our comparison to an alternative engineering-based approach.
For new properties, provide the type building, cost basis information for the building only (excluding land), and the in service date.
Sample Attached by clicking below:
First of all, compliance with the Audit Technique Guideline. Our compliant services will not get you, CSSI, or the tax professional in trouble. Our study source document will allow your tax professional to change your depreciation schedule in a beneficial manner so that you can defer income tax and retain the money you would have paid in income taxes – creating Cash Flow. You will also be positioned for compliance with the new Tangible Property Regulation in that your schedule will identify and quantify your units of property, building systems, and major structural components. These are crucial for future expense/capitalization decisions. Moderate to large expenditures for improvements that won't fit under the safe harbors are compared to the appropriate building system replacement cost basis in order to determine significance or insignificance under the "Ratio Test". If insignificant, typically 30-35% or less, then you get to expense. If significant with larger %, then you must capitalize. If you don't know the building systems, many will end up capitalizing expenditures that could have been expensed - a very expensive penalty for the property owner!
Your tax professional plays an important role in this process implementing the study findings on your behalf. When cost segregation began, it was very expensive and only properties with millions of dollars of cost basis could be cost effective. With the passage of time, technology and entrepreneurism, but primarily the issuance of clarification through the Audit Technique Guideline, the process became affordable for the typical property owner. Many are only now recognizing the change and considering the application for their clients. Also the Repair Regulation (Tangible Property Regulation) provided an additional need for identification of component assets for compliance and to be able to take advantage of the approval of partial disposition for buildings.
Yes, if some of the below apply:
- Too long existing ownership: Property may be too far depreciated. 20 years or less works
- Client not making money: Benefits those making money, paying tax, and desire to pay less.
- Client selling building soon (1 or 2 yrs.): Limited benefit years prior to recapture.
- Active\Passive Income Considerations? Sometimes Passive Income is limited. (Possible solutions: Can self- rental be increased; qualify as a real estate professional? Grouping entities under 1.469-4?)
In the past cost segregation was an economic choice. Now with the Tangible Property Regulation, compliance is another important reason beyond economic benefit. For those clients that can not benefit from accelerated depreciation, there are now reasons to do at least an “abbreviated study” for compliance. There is now a need for identification of cost basis to each unit of property and the need to identify and quantify the various building systems and major structural components to facilitate partial dispositions and providing crucial detail for making future expense/capitalization decisions.