COST SEGREGATION STUDY
New Tax Law
New Tax Law - The Tax Cut and Jobs Act, 12/22/2017 Good News - 100% Bonus Depreciation for 20 years-life or less (mostly 5, 7, 15 years for real estate) segregated property classfication can be allowed for the property placed after September 27, 2017.
Example - Actual Case I Performed
14-Story Office Building
Purchase Price - $37,170,000
Improvements Basis (for Cost Segregation) except Land - $30,985,316
After Cost Segregation
5-year life class - $5,888,901
(19.01% of the improvements basis)
7-year life class - $154,563 (0.50%)
15-year life class - $324,665 (1.05%)
Total eligible for 100% Bonus Depreciation at the first year (5, 7, 15 years class combined) under the new tax law:
$6,368,129
If under the old tax law prior to 09/27/2017, apply the double-declining balance method, the first year (5, 7, 15 years class combined), the depreciation will be:
$2,432,923
That is the increase of depreciation benefit of $3,935,206 at the first year.
Assuming a tax bracket of 37% for married filing jointly over $600,000, additional tax savings will be $1,456,026 depending on the individual or entity's tax situation.
Cost Segregation Study Benefits
Take a huge tax deduction by doing the Cost Segregation. Under the alternative depreciation system, as modified by the Act, the recovery periods for nonresidential depreciable real property, residential depreciable real property and qualified improvements are 40 years, 30 years and 20 years, respectively. The Act extends and modifies the additional first-year depreciation deduction for qualified depreciable personal property by increasing the 50% allowance to 100% for property placed in service after September 27, 2017, and before 2023. After 2022, the bonus depreciation percentage is phased-down to 80% for property placed in service in 2023, 60% for property placed in service in 2024, 40% for property placed in service in 2025, and 20% for property placed in service in 2026. The bill removes the requirement in current law that the original use of qualified property must commence with the taxpayer. Thus, immediate expensing applies to purchases of used as well as new items.
Update As of 03/04/2025 About the Bonus Depreciation
At the State of the Union 2025, President Trump announced that the 100% bonus depreciation will be extended retroactive as of 01/01/2025 that is the extension of 2017 Tax Cut Jobs Acts (TCJA). Althoug it is not a finalized law yet, it is definitly a good sign for our economy recovery effort.
What is Cost Segregation?
Something called cost segregation may help owners of commercial real estate save significantly on their federal income taxes.
The primary goal of a cost segregation study is to identify all construction-related costs that qualify for accelerated income tax depreciation. Small or large, your business can save money with a cost segregation study, typically many times the amount you invest. The Benefits of Cost Segregation We perform a detailed analysis of your commercial property for the purpose of identifying all of the construction related expenses that can be depreciated over 5, 7 and 15 years. The result of our study is the accelerated depreciation of these deductions, reducing your tax liability and increasing your cash flow.
Under Old Tax Law
The Benefits of Cost Segregation (applicable to prior to 09/27/2017)
Cost Segregation is a tax planning tool that determines how quickly an owner should be depreciating the property on his income taxes — five years, seven years, 15 years, 27.5 years or 39 years. The Internal Revenue Service allows owners of commercial properties to accelerate depreciation on their real estate, which will result in reducing the property owner’s taxable income levels. A cost segregation study is an in-depth analysis of the costs incurred to build, acquire or renovate a real estate holding.
Qualifying Properties:
Hotel/Motel, Gas Station/ Car Wash, Industrial/ Warehouse Building, Apartment, Office Building, Grocery Store, Restaurant, Retail, Nursing Homes, Golf Course, Auto Related, Leased Tenant Improvements.
Any commercial/investment real property placed into service since January 1st, 1987 may benefit from a Cost Segregation Study (CSS):
Critical timing is when the property was placed into service by the current owner / taxpayer, not when the building was originally constructed.
•New construction, including renovation, remodeling, restoration, or expansion to an existing building
•Property acquired via purchase
•Property acquired via inheritance
•Property which received step-up in basis
•Major leasehold improvements
Certain types of buildings benefit from a CSS more than others. Those are the types of buildings that tend to contain:
•More specialty plumbing, electrical, HVAC system, etc.
•Higher amount and quality of personal property
•Extensive land improvements
Classification from real property to land improvements and personal property: Examples of Qualifying Properties:
» Airports
» Apartment Buildings
» Assisted Living Facilities
» Automobile Dealerships
» Bank Branches » Casinos
» Cinemas
» Day Care Facilities
» Department Stores
» Distribution Centers
» Fitness Centers
»Food Processing Facilities
» Funeral Homes
» Gas Stations
» Golf Courses
» Grocery Stores
» Hospitals
» Hotels/Motels
» Industrial Facilities
» Laboratories
» Manufacturing Facilities
» Marinas
» Medical Centers
» Medical Facilities
» Mixed-Use Facilities
» Nursing Homes
» Office Buildings
» Parking Lots
» Pharmaceutical
» Physician Practices
» Public Utilities
» Research Facilities
» Retail Centers
» Resorts
» Restaurants
» Shopping Centers
» Sports Facilities
» Storage Facilitie
» Warehouses
Range of average benefits
Property Type Basis Reallocation
Apartment Buildings 20 - 50%
Office Buildings 10 - 40%
Restaurants 10 - 40%
Hotels 15 - 40%
Light Manufacturing 15 - 40%
Heavy Manufacturing 25 - 70%
Grocery Stores 15 - 50%
Retail Facilities 15 - 40%
Warehouses 8 - 30%
Processing Plants 15 - 40%
R & D Facility 20 - 50%