Frequently Asked Questions

What is a Cost Segregation Study?

A Cost Segregation Study (CSS) is a detailed analysis of all costs associated with the acquisition or construction of a building.  The purpose of a CSS is to identify and price non-structural elements and exterior site improvements that may be properly classified as personal property with a 5, 7 or 15 year depreciable life.  The results are obvious and most favorable.  As you decrease the recovery period (depreciable life), you increase your annual depreciation deduction, which increases cash flow by decreasing tax expense.

How Much Should I Expect To Save With a Cost Segregation Study?

It is common for a cost segregation study to generate hundreds of thousand or even millions of dollars in net present value savings. The average study will allocate, or reallocate in the case of a look-back study, anywhere from 20 – 40 % of the depreciable cost basis to a shorter life. For every $100,000 moved from 39-year to 5-year the 10-year net present value savings is approximately $28,000 (based on a 40% tax rate and a 6% discount rate). The 40-year net present value saving is approximately $20,000.

Who Can Benefit From a Cost Segregation Study?

Any company or individual that has purchased or modified an existing commercial or multi-family residential building, or is planning to construct a new building can benefit from a CSS.  Generally, a CSS can be performed on existing buildings that are up to 15 years old.  Projects with costs of $1 million or more, larger technical and more ornate projects usually result in greater tax benefits than smaller, simpler projects.  Nonetheless, small projects can and do produce benefits well in excess of the study’s cost.

What Types of Properties Qualify for Cost Segregation?

Properties that typically offer the greatest benefit from a CSS include:

Office Buildings Restaurants Warehouses and Distribution Centers Shopping Centers and Malls Banks and Financial Institutions Daycare Facilities

Retail Stores and Chains Hotels and Motels Auto Dealerships Hospitals and Medical Facilities Residential Developments Recreational Facilites

How Much Does a Cost Segregation Study Cost?

The fee for a cost segregation study can vary greatly depending on the property type, size and complexity as well as the quality of the provider and their work product. Whatever the situation, the fee for a cost segregation study should be based on time and materials or fixed fee basis and NEVER on a contingency basis (% of savings). The IRS specifically states in the Audit Techniques Guide (ATG) that, “examiners should closely scrutinize studies performed on contingency fees.” The reason for this is that a contingency fee arrangement creates an incentive for the cost segregation consultant to be overly aggressive and utilize inappropriate estimating techniques. Property owners and their advisors should avoid cost segregation providers charging on a contingency basis. Most reputable cost segregation providers work on a fixed fee basis.

Who Can Perform Cost Segregation Studies?

The IRS has published guidelines for the determination of a quality CSS.  These guidelines require that the CSS be performed by persons with expertise and experience.  Expertise is defined as requisite knowledge of both the construction process and the tax law involving property classifications.  While CPA’s generally know the tax law, they likely do not have the necessary knowledge of the construction process to conduct a CSS which is acceptable to the IRS.  The IRS standards for a quality CSS are high and acceptance of the CSS by the IRS is dependent upon meeting those standards.