Tax Reductions and the IRS Position on Cost Segregation

Tax reductions and tax deductions are a common benefit of cost segregation. When real estate investors and tax practitioners learn about the income tax deductions and tax reductions resulting from cost segregation they are sometimes skeptical; they are concerned it is a tax shelter or tax scheme. This simply is not true. Cost Segregation provides a legitimate tax reduction.

The IRS has published the Audit Techniques Guide (ATG) describing cost segregation and the proper methodology to achieve maximum tax reductions. They report cost segregation is a more accurate method of depreciating real estate (since it establishes a depreciation schedule based on the appropriate life for each component). Depreciation is a key component in tax reductions.

Cost segregation is not difficult conceptually. It involves separating components of the real estate (such as carpet, vinyl tile, paving, sidewalks and landscaping), which have a shorter economic life and depreciate over a shorter period of time. The IRS has generally defined which components qualify for short life depreciation in the ATG. The ATG provides a safe harbor for real estate owners who depreciate real estate consistent with its guidelines.

While cost segregation is simple in concept, its application is somewhat arcane. For example: why is a roof long-life property (39 years for commercial property) while concrete paving is short-life property (15-year property). Most owners would agree the paving would outlive the roof. Another example: why are removable ceiling tiles long-life property while a tree is short-life property (15 years) in most cases.

The arcane nature of which components can be depreciated over a short-life basis derives partially from the impact of investment tax credit guidelines, which influenced the rules. In addition, court decisions and IRS guidelines have created rules that are not intuitive. However, for most components, rules have been clearly articulated to define their depreciable life.

These rules and guidelines for methodology in the ATG clearly define the IRS’s position regarding cost segregation and benefit from authorized tax reductions.

Cost segregation produces tax deductions and reduces federal income taxes across the country and in every size market. Below are just a few examples of where cost segregation generates meaningful tax deductions.

City:

Boston, MA
Washington, DC
San Francisco, CA
Dallas/Ft. Worth, TX
Bridgeport, CT
Orlando, FL
Las Vegas, NV
Hartford, CT
Tampa, FL
Baltimore, MD
Allentown, PA
Grand Rapids, MI
Syracuse, NY
Lancaster, PA
Detroit, MI
San Diego, CA
Akron, OH
New Haven, CT
El Paso, TX
Buffalo, NY
Palm Bay, FL
Springfield, MA
Manchester, NH
San Jose, CA
Chattanooga, TN
Lakeland, FL
Greenville, SC
Rochester, NY
Santa Rosa, CA
Cincinnati, OH

Cost segregation produces tax deductions for virtually all property types.

Property Type:

Car wash facility
Used car lot
Hotel
Movie theatre
Mini-warehouse
School
Discount store
Cold storage facility
Drugstore
Self-storage

Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.

Industry:

Health care facilities
Golf courses and country clubs
Transportation equipment manufacturing
Printing activities
Mineral product manufacturing
Textile product mills
Textile mills
Day care facilities
Beverage and tobacco product manufacturing
Warehousing and storage

O’Connor & Associates is a national provider of commercial real estate consulting services including cost segregation , due diligence, federal tax reduction, renovation upgrading cost analyses, tax return review and apartment inspections.