1. Cost Segregation - 101
The Key to Unlocking Income Tax Savings & Increased
Cash Flow for Commercial Property Owners
2. Agenda
• Intro
• What is Cost Segregation?
• History of Cost Seg
• Who Qualifies?
• Benefits of Cost Seg
• Cost Seg Class Lives
• How to Share Cost Seg
• Q & A - Conclusion
3. • Commercial property owners are
unaware of this tax strategy.
2 Major Problems
• There are thousands upon
thousands of property owners
overpaying their taxes.
4. CB Richard Ellis Acquires Cost
Segregation Business from
Marshall Stevens
“This is an attractive opportunity to expand the scope
of services we offer clients,” said Cal Frese, CB
Richard Ellis’ CEO. “Virtually every property owner,
and every company that leases space, can benefit from
a cost segregation analysis. We are now the only real
estate services company with the resources and
expertise to provide clients with this service, another
way that we are achieving differentiation in the
marketplace.”
5. The U.S. Treasury Department States:
“Cost Segregation is a Lucrative Tax
Strategy that should be used in almost
Every Major Purchase of Commercial
Real Estate.”
– Wall Street Journal - June ’03
Real Estate Tax Strategy
6. An IRS approved tax strategy for
commercial property owners to shorten
the depreciation on their buildings for
income tax purposes.
It is a combination of tax law and
engineering principles which reduces
current income tax obligations.
What is Cost Segregation:
7. In short, it is the correct
method to depreciate
commercial real estate.
What is Cost Segregation:
8. Don’t CPA’s Handle This?
• Cost Segregation is a relatively new concept.
• Because a cost seg study is a combination
of tax law and engineering principles, most
accounting firms do not offer in house.
• The IRS recommends an engineer based
approach to identify and reclassify building
costs into appropriate categories.
9. Cost Segregation:
Origin & Case Law
The Tax Reform Act of 1986
Before
• Investment Tax Credits
(ITC)
• Component Depreciation
• Real Estate depreciated
over a period of 19 years
After
• Commercial Real Estate
depreciated over 31.5 years
• Residential Real Estate
depreciated over 27.5 years
• In ‘93 – Commercial depr.
changed from 31.5 to 39
years
10. Cost Segregation History:
Origin & Case Law
• U.S. Tax Court Ruling (1997):
They ruled that the practice of
segregating building costs, for tax
purposes, was allowable.
11. Cost Segregation History:
Origin & Case Law
• Landmark Cases:
- Walgreens Court Ruling (1996)
- Hospital Corp. of America
(HCA) Ruling (1997)
17. Cost Segregation History:
Origin & Case Law
• Landmark Cases:
- Walgreens Court Ruling (1996)
- Hospital Corp. of America (HCA) Ruling (1997)
• U.S. Tax Court Ruling (1997):
“Certain assets in the hospital facilities could be considered
personal property and depreciated over a 5-year period.”
• IRS Action on Decision (Sept. 3, 1999) :
“We acquiesce in this decision…The issue as to whether the
various disputed items are structural components or tangible
personal property is a factual question.”
18. The IRS Website States:
“The HCA ruling effectively reinstated a
form of component depreciation for certain
building support systems, such as the
electrical and plumbing systems that directly
serve tangible personal property. Therefore,
cost segregation methodologies previously
used to allocate the cost of a building
between structural components and ITC
property can now be used for §1245
(personal) and §1250 (real) property.”
19. Cost Segregation:
Origin & Case Law
After the 1997 Hospital Corp. Ruling
• Very large commercial property owners
began utilizing cost segregation
• At that time, costs to conduct a study were
high and rules were vague, so generally it
was only profitable for properties over $10
million.
But……
20. Audit Techniques Guide
In 2002, the IRS finalized its “Cost
Segregation Audit Techniques Guide to:
• Clear up any vague rules
• Layout audit techniques and explain what
IRS auditors should identify in a cost
segregation study
21. Cost Segregation Qualifications?
• Properties purchased, built,
renovated, acquired, after 1986
• Building cost basis over $250,000
• Tenant Improvements over $100,000
• Owned by a “For Profit” entity
• Owner has taxable income
• Property will be held at least 3-5 years
22. Who Should Not Do Cost Seg?
• Property owners who have no tax
liability.
• Investors who are flipping properties
in 1-2 years.
23. Kinds of Buildings
• Restaurants,
• Office Bldgs.
• Medical/Dental Offices
• Manufacturing/Warehouses
• Retail/Shopping Centers
• Self-Storage Facilities
• Hotels/Motels
• Apartment Bldgs.
• Almost any commercial property
27. Desktop Approach
90%
10%
39 Year
Property
$1,000,000
“An Accurate cost segregation study may
not be based on non-contemporaneous
records, reconstructed data or taxpayer’s
estimates or assumptions that have no
supporting record.”
Source: (IRS Audit Techniques Guide, pub. April 2004)
…enter Cost Segregation
30. Why Shorten Depreciation?
• Tax savings range 7% - 12% of building
cost (minus land)
• $1m property = $70k to $120k cash in
pocket savings usually within 5 yrs
Other Benefits…..
31. Catch-Up Depreciation
• Purchased Property in 2009
• Cost Segregation done for 2015
Catch-up depreciation is the difference in the depreciation they
took and the depreciation they would have taken had they done a
CS study back in 2009.
Taken in the tax year for which the study is conducted
32. Catch-Up Depreciation
•The opportunity here would be clients that
purchased property years ago
•Letting them know about potential catch-up
depreciation could be very beneficial to their
financial health without amending tax returns
•Providing an idea that many tax professionals are
not aware of, thus separating yourselves in the
marketplace
33. Bonus Depreciation
Additional First-Year Deprecation for New Property
Example:
Purchase of existing building = $1m
New tenant improvements = $300k
Cost seg can be done on the building and
TIs, but only TIs would qualify for Bonus
37. Cost Segregation Class Lives
5 Year
Personal
Property
$300,000
15 Year Land
Improvements
$150,000
39 Year
Real
Property
$550,000
38. Cost Segregation Class Lives
55%
30%
15%
5
Year
15
Year
39
Year
39 Yr Property - Foundation, Walls, Roof, Doors,
Hardware (Real Property)
39. Cost Segregation Class Lives
55%
30%
15%
5
Year
15
Year
39
Year
39 Yr Property - Foundation, Walls, Roof, Doors,
Hardware (Real Property)
15 Yr Property – Landscaping, Parking
Lots, Sidewalks, Dumpster Enclosures,
Flag Poles (Land Improvements)
40. Cost Segregation Class Lives
55%
30%
15%
5
Year
15
Year
39
Year
39 Yr Property - Foundation, Walls, Roof, Doors,
Hardware (Real Property)
15 Yr Property – Landscaping, Parking
Lots, Sidewalks, Dumpster Enclosures,
Flag Poles (Land Improvements)
5 Yr Property –
Carpeting, Decorative
Millwork, Electrical and
Plumbing for specialty
equipment (Personal
Property)
41. Thank You!
For a free estimate or to learn more,
see us online
www.natcss.com
42. Cost Segregation
A Tool To Build Trust
How happy would your clients be if you can
show them upfront income tax savings?
43. Cost Segregation
A Tool To Build Trust
• Getting a cost segregation projection to
share with a new or old client is a free
service we provide
• No selling or buying anything – just
educating and sharing
44. First Steps – Get a Free
Projection
• Complete a one page form
• Or cost of bldg. and/or TI’s less land
• Placed in service date
• Type of bldg.
• Review Preliminary Projections
• Additional Depreciation
• Tax Savings
• NPV Numbers
• One Time Fee
45. Getting Started on a Cost
Segregation Study
• Sign proposal and collect 50% deposit
• Gather building blueprints
• Conduct a site visit
• Engineers review plans and complete the
engineering on the property
• Tax manager completes the study
• Final delivery to client and CPA in about
4 – 6 weeks and collect remaining balance
• CPA applies study and client saves cash
46. Time is Money
A dollar today is worth more than a dollar tomorrow, so naturally a
tax deduction today is worth more than a tax deduction tomorrow.
40 years ago, 1975, the price was…
Gas.......................$ .55 per gallon
Average home......$ 45,600
Average income...$ 15,734 year
What will today's dollar
buy in 40 years? Not much!
47. FAQ’s
• Will a study trigger an IRS audit?
• Is there audit protection?
• How much is a cost seg study?
• What about a 1031 exchange?
• Do we prepare Form 3115 (change in
accounting method)?
48. Summary
A Cost Seg Analysis Should Provide These Benefits:
• Substantial return on investment
• Tax benefits via increased tax deductions for
depreciation
• Opportunity to contact prior clients to claim
“catch up” tax deductions in the current year
• Increased cash flow to buy additional real estate
• If done right - will withstand IRS scrutiny
49. Thank You!
For a free estimate or to learn more,
see us online
www.CostSegregationService.com
