What is Cost Segregation?
Cost Segregation is an effective tool that allows real estate owners to increase their cash flow by accelerating depreciation deductions and deferring Federal and State income taxes.
In sum, a Cost Segregation Study identifies and reclassifies project related costs that are currently classified as either residential real estate with a depreciable life of 27.5 years, or nonresidential real estate with a depreciable life of 39 years, to property with a five, seven or 15 year life. Reclassification is appropriate because very often buildings are designed to accommodate specific equipment or land improvements with shorter depreciable lives.
For example, a restaurant is often designed to accommodate its kitchen equipment, furniture and fixtures, which have five and seven year lives. An industrial building may be designed to accommodate a particular piece of equipment or clean room, to the point where it is difficult to tell what is the equipment and what is the building.
What is the Typical Reclassification?
Based upon our experience, the typical project-related construction costs that could be reclassified from 27.5/39 year real property to either five or seven year personal property, or 15 year land improvements, are:
• Offices – 10% to 15%
• Restaurants – 25% to 40%
• Hotels – 25% to 40%
• Retail – 25% to 40%
• Industrial – 10% to 20%
• Manufacturing – 20% to 60%
What are the Benefits of Reclassification?
By reclassifying $100,000 of project-related costs of a nonresidential property to a shorter life, the benefits realized could be as follows:
|5 Yr Property||5 Yr Property|
|Potential Increase in Annual Depreciation||$18,600||$12,900|
|Federal Income Tax Deferral||$6,300||$4,400|
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