New Law Increases Potential Tax Benefits of Real Estate Cost Segregation

KEVIN DOSTALER, CPA

If you plan to purchase, construct or renovate a building, or have done so in the past, you could save a bundle in taxes if you invest in a cost segregation study.

An under-used tax strategy, cost segregation can help you get the maximum return on your real estate investment by reducing taxes and increasing cash flow. For 2008 only: the potential tax savings are increased by a provision in the Economic Stimulus Package Act of 2008.

Depreciation is the key


Commercial buildings are typically depreciated over 39 years, but many items included in and around the building can actually be depreciated more quickly. Cost segregation experts identify and segregate those assets that can be depreciated over five, seven or 15 years. By reclassifying these assets and accelerating their depreciation, you accelerate expense and decrease your taxable income. As a result, you pay less in taxes during the early stages of the property’s life, and the present value of the tax savings can be substantial.

2008 bonus depreciation:


The Economic Stimulus Package Act of 2008, which was designed to boost the U.S. economy, included a couple of sweet tax incentives for businesses –– one of which was bonus depreciation for 2008. For eligible property, the special depreciation amount is equal to 50 percent of its adjusted basis. The property must be “placed in service” during 2008 in order to qualify. Qualified property includes, but is not limited to:
  • tangible property with a recovery period of 20 years or less, and

  • qualified leasehold improvement property.


Given the requirements for bonus depreciation and the potentially huge tax savings, it would be wise to have a cost segregation study on property placed in service during 2008 in order to classify as much property as allowed in the less-than-20-years recovery category.

What kinds of buildings qualify for cost segregation?


  • New buildings currently under construction,

  • Existing buildings that you are renovating, remodeling, restoring,

  • Expansion of existing buildings,

  • Office or facility leasehold improvement and “fit-outs,”

  • Purchase of existing buildings.


As you might imagine, the bigger the building … the greater the potential for savings. However, even real estate valued for as little as $1 million can benefit. Any type of building from a hospital to an office building can be loaded with shorter-lived assets.

What types of assets may qualify?


Examples of assets that may qualify for shorter tax lives include: certain electrical work and lighting, patient corridor handrails, accordion doors or partitions, HVAC units, plumbing services related to equipment, some floor and wall coverings, cabinets, and even signage and certain landscaping.

How much does cost segregation cost?


A cost segregation study should not be considered an expense but an investment. Generally, the present value of the tax savings approximates six or more times the cost of the study.

How much can you save?


Savings vary from project to project, but healthcare facilities tend to be ripe with opportunity. For example, a recent cost segregation study for an $18 million healthcare facility in Franklin resulted in a projected net present tax savings of more than $875,000.

Not just for new buildings:


While the bonus depreciation applies only to property placed in service in 2008, the benefits of cost segregation are not limited to new construction. If you constructed, purchased or renovated a building after 1986, there are still opportunities to minimize your tax. Even if the building was constructed before 1986, but “placed in service” after 1986, you could still benefit from a cost segregation study on that building.

Find a reputable provider:


Cost segregation is a highly technical service, best provided by CPAs who have specialized training in this area. Be sure your provider uses an engineering-based approach that is fully documented and in compliance with IRS rulings on the subject.

Check references and ask for a no cost, no obligation consultation, including an estimate of the present value tax savings and fees. If your practice or company could benefit from a cost segregation study, a good provider should be able to give you an indication of the costs and benefits before asking you to sign an engagement letter. If you follow these guidelines, you should have nothing to lose by exploring cost segregation as a tax reduction strategy.


Kevin Dostaler, CPA, is a senior tax manager with Nashville-based KraftCPAs PLLC. He may be reached at kdostaler@kraftcpas.com.