Cost segregation studies are a tax planning strategy that can be used by commercial property owners to reallocate the costs of a building and its components between personal property and real property. The goal of the study is to identify assets that can be classified as personal property, which is depreciated over a shorter period of time than real property, in order to increase tax deductions and decrease tax liability.
The cost segregation study is performed by a qualified cost segregation expert, who will perform a physical inspection of the property, review blueprints and construction documents, and conduct interviews with the property owner and any relevant parties. The study will identify all of the assets within the building that qualify as personal property and estimate the cost of each asset. These costs are then segregated from the costs of the building and its other components, which are considered to be real property.
Examples of assets that may qualify as personal property include:
- Trade fixtures (shelving, display cases, etc.)
- Equipment (air conditioning units, boilers, etc.)
- Building systems (electrical, plumbing, etc.)
- Landscaping and site improvements (parking lots, sidewalks, etc.)
Once the study is complete, the property owner can use the information to reallocate costs and depreciate the personal property over a shorter period of time. This can result in significant tax savings, as the property owner will be able to take larger deductions in the early years of ownership.
It’s important to note that cost segregation studies can be complex, and it’s important to work with a qualified expert to ensure that the study is done correctly and complies with all relevant tax laws. Additionally, it’s important to be aware that cost segregation studies are subject to audit by the IRS, and it’s important to have detailed and accurate records to support any cost segregation calculations.