COST SEGREGATION STUDIES:
KEEP MORE OF YOUR OWN MONEY, COLORADO
The History of Cost Segregation
Cost segregation is a tax strategy that allows property owners to accelerate depreciation deductions, reducing taxable income and increasing cash flow. This approach involves identifying and reclassifying personal property assets to shorten the depreciation time for taxation purposes, typically from 39 years to 5, 7, or 15 years. While cost segregation has gained popularity in recent years, its roots trace back several decades.
Early Beginnings
The concept of cost segregation first emerged in the late 20th century, during a time when the tax code was becoming increasingly complex. The Tax Reform Act of 1986 played a pivotal role in shaping modern cost segregation. This Act introduced the Modified Accelerated Cost Recovery System (MACRS), which established different depreciation schedules for various asset classes. Property owners and tax professionals began to explore how reclassifying assets could yield significant tax benefits.
Development and Acceptance
Throughout the 1990s, cost segregation studies became more refined. The IRS issued guidelines that provided clarity on how cost segregation should be conducted. Landmark court cases, such as Hospital Corporation of America (HCA) v. Commissioner in 1997, further legitimized the practice. In this case, the court ruled in favor of HCA, allowing the company to segregate its property into different asset classes, thereby accelerating depreciation.
Technological Advancements
The early 2000s saw significant advancements in technology, which revolutionized cost segregation. Improved software and data analysis tools enabled more precise and efficient studies. As a result, cost segregation became accessible to a broader range of property owners, including those with smaller properties.
Current Practices
Today, cost segregation is a well-established tax strategy used by property owners across various industries, from residential rental properties to large commercial real estate holdings. The practice continues to evolve, with ongoing updates to tax laws and regulations influencing how cost segregation studies are conducted.
How Does Cost Segregation Work?
An experienced and qualified company, conducts engineering-based cost segregation studies on your property. These studies accelerate the depreciation of building and renovation components into shorter categories, such as 5, 7, and 15 years, instead of the conventional 27.5- and 39-year schedules.
Examples of items depreciated over 5 and 7 years include decorative building elements, electrical systems for dedicated computer equipment, and carpet. Items depreciated over 15 years might include site utilities, landscaping, and paving. This engineering-based study results in a much higher depreciation expense, significantly reducing taxable income for the property owner.
Importantly, cost segregation can be applied to buildings purchased or built since 1986, including renovations, and there is no need to amend your tax returns.
How To Get Started with a Cost Segration Study:
To receive your no-cost preliminary property analysis Illustrating the estimated tax savings and increased cash flow your property would create from an engineered-based cost segregation study, please provide us the following information: