FAQS

• What is Cost Segregation? Cost Segregation is an engineering-based analysis that reclassifies or segregates real estate components and improvements between real and personal property. Cost Segregation should actually be called Accelerated Depreciation.  By segregating components that make up a real estate property, you are able to correctly classify and take the deductions that are available to you. This reduces your Federal Income Tax. Most Tax Professionals do not do Cost Segregation because it’s not an accounting specialty, and they do not have the expertise on staff to do engineering-based Cost Segregation. We provide your tax professional the tools to get this done. Our company has completed over 40,000 Studies in all 50 states for clients who own hotels, office buildings, retail buildings, warehouses, self-storage facilities, mobile home parks, single family rentals, Airbnb condos and many other types of Real Estate.

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• What is Cost Segregation For? It works on existing properties as well as new construction. As long as your original building costs and improvements are more than $100,000.00 and you don’t plan on selling your property in the next 3 years, A Cost Segregation Study can most likely save you thousands of dollars in taxes.

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• Does my property Qualify? Yes, all properties purchased, constructed, or remodeled property after Jan. 1, 1986.

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• Can I benefit form a Cost Segregation? Most likely.  Click on the link below,  fill out the Basic Info and we’ll have your income tax savings estimate to you within 2 business days for you and your Tax Professional to review. 

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• When should it be done? Ideally in the first year of ownership. It is always best to have a study completed for the year the building or improvements are placed in service. However, US Tax Code allow taxpayers to “catch up” on the depreciation that was not claimed from the first day the property was placed in service without amending prior years’ tax returns. All the depreciation that could have been taken but wasn't is then brought up tp the current year of application. Usually it is worth looking into Cost Segregation for properties purchased 15 years ago. Especially if these properties underwent renovations over the years.

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• How does a study work? Engineering-based cost segregation studies have to be performed by professional personnel with in-depth knowledge of construction methods, materials, and building components. By correctly classifying all the components that make up a Real estate property, we can then segregate the Tangible Personal Property and  Land Improvements, which depreciate faster, from the and Real Property that will still depreciate over 27,5 or 39 years. This detailed breakdown gives your Tax Professional the ability to then claim larger deductions and plan accordingly to minimize or reduce your Taxable Income.

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• Why should I perform a study? If you own Real estate investments and you are currently paying income taxes, the Tax Shelter available to you can greatly reduce your Tax Liability. Without a Cost Segregation Study your accountant will only be able to use straight line depreciation, 39 or 27.5 years. A Cost Segregation Study provides your accountant with accurate information to establish 5, 7, 15, and 27.5 or 39-year depreciation schedules, which substantially increases tax savings in the earlier years of owning your property.

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• How long does it take? A Cost Segregation Study normally takes about 6 to 8 weeks to complete.

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• Will a Cost Segregation trigger an audit? No. A Cost Segregation Study strictly adheres to the Cost Segregation Audit Technique Guide published by the IRS.

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• Can a Cost Segregation Study apply to buildings not yet constructed? No, since you can only claim deductions from properties you currently own. We do provide estimates for properties you plan on purchasing as it can give you an idea of the potential cash flow the proposed purchase might generate. It will even help with underwriting.

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• Who should perform the study? Always choose an engineering-based cost segregation company that has the expertise in tax laws, cases, and ruling on cost segregation, along with real estate development and construction experience to maximize your tax savings. It's also important to make sure there are no surprise fees or surcharges in case you ever need support.

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• What are the benefits of Cost Segregation? There are numerous benefits to those who qualify for Cost Segregation. While no one enjoys paying taxes, it is something that we must do. Fortunately, there are many different tax benefits to take advantage of with Cost Segregation.

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• Are there any reasons not to get a Cost Segregation Study? Yes. If you plan to sell your building soon, the strategy needs to be correctly analyzed as you will have recapture taxes. If you simply do not owe any income taxes, then there also is no point in engaging in such a study. Lastly, we need to make sure you can use these deductions and won't be hit with any passive income limitations.

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• Are Short Term Rentals depreciated over 27.5 years like a residential rental? No. This is a common misunderstanding by both tax professionals and investors. STRs must be depreciated over 39 years like a hotel, whether active or passive. Think of it this way, even if a hotel/motel is owned by an investor and he/she has managers who run it daily, it must be depreciated over 39 years. 

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• Can I use the cost segregation benefits from my Short Term Rental to offset my W2 income? Maybe. If you or your spouse materially participate in the property by spending at least 100 hours per year actively managing your STR and more than any other person or business entity, and the average customer stay is 7 days or less, the answer is yes. That property becomes an active investment, and the benefits can be used against your W2 income. If you or your spouse are not providing enough hours to be considered actively participating in the property, it becomes a passive investment, and the benefits can only be used against the income from that STR.  See Treas. Reg. 1.469-5T(c)(2)

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• Do I have to be a Real Estate Professional to make my Short Term Rental an active investment? No. The property is automatically an active investment/business if the owner is materially participating 100 hours or more per year and more than anyone else.   

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• Does my tax professional need to report my short-term rental on Schedule C? Schedule E is what your tax professional will generally use. https://www.irs.gov/pub/irs-wd/202151005.pdf (see pages 3 & 4). Schedule C is needed if the owner provides significant services for the occupants' convenience, other than the space rental and to maintain the property. Examples of these significant services (regular cleaning, changing linen, maid service, transportation, tours, etc.) and are described in Treas. Reg. Sec. 1.1402(a)-4(c)(2). 

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• Can we include furnishings for a STR in our cost segregation study? Yes, if the furnishings were purchased prior to renting or if you bought it turn key, they will be depreciated over 5-years and can be included in a cost segregation study to maximize your depreciation and possible Bonus Depreciation.  https://www.irs.gov/pub/irs-pdf/p527.pdf 

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• What is a Partial Asset Disposition? A Partial Asset Disposition allows a building owner to write down the items removed during a renovation or remodel, as well as the costs for removal and disposal of those items. 

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• How will a Cost Segregation study create cash-flow for my business? Cost segregation is the method of re-classifying components and improvements of your commercial building from real property to personal property. This process allows the assets to be depreciated on a 5-, 7-, or 15-year schedule instead of the traditional 39-year life of real property. Thus, your current taxable income will be greatly reduced and your cash flow will increase $60,000 to $100,000 for every 
  $1,000,000 of building cost. This is your money to use now.  

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• Can I schedule my repairs and maintenance so that they can be expensed? Yes. There are three strategies available. You should be proactive and strategize on all expenditures that are over $2,500. The first is the de minimus safe harbor limit which all businesses can take advantage of. Any expenditure under $2,500 can be expensed. Second, if expenditures are deemed repair and maintenance, not a betterment, they can be expensed. Third is the small tax payer safe harbor which is an excellent opportunity for commercial and income property owners. Owners would take 2% of the unadjusted basis of each building and write down expenditures under that 2% number. 

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• Can I do Cost Segregation on a Property I purchased with a 1031 Exchange? Of course you can but bear in mind your carryforward will reduce your Depreciable Basis. What this means is that the depreciation and capital gains carried into the new property will reduce the building value we can work with. Even though, Cost Segregation is usually beneficial.

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• Can I do Cost Segregation on a Property purchased through a Qualified Opportunity Zone? Yes, just like the 1031 though, your basis will be reduced by the capital gains that you are sheltering in the QOZ. If you acquire the QOZ property with additional funds, or even debt, that portion can be used to get you larger deductions. After holding for 10 years and complying with the QOZ rules, you will not owe any recapture on the depreciation taken over that period.

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• What will happen in the event of an audit? Although a Cost Segregation study has never triggered an audit, if you are under audit for any reason, and the Cost Segregation Study comes into question, we will defend the audit at no additional cost.

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• Did I not answer your question? I'm always happy to jump on a call as I take great satisfaction in collaborating with tax professionals, bankers, real estate professionals, building owners and anyone else that might have interest in order to educate them on the advantages of cost segregation.

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If you're interested in learning more, or if you have particular questions you would like help answering, let's connect! 

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