Uncover Tax Savings in Your Real Estate Through Cost Segregation

Do you want to recoup the costs of your real estate investments quicker and boost your company’s cash flow? An accounting concept known as cost segregation reclassifies elements of your property so they qualify for faster depreciation.

“Traditionally, the total value of buildings and what may be considered personal property inside of them is depreciated over 39 years,” according to Robert E. Mapes, CPA, a member of Rea’s tax team. “However, in recent years, due to a pro-taxpayer court decision and some new guidance from the IRS regarding depreciation method changes, many companies may have the opportunity to change their method of accounting for depreciation to one that is more advantageous to them.”

The actual amount and timing of tax savings through accelerated depreciation has a lot to do with the specifics of the property and the components. On average, companies can gain a net present value of $200,000 of additional cash flow for every $1,000,000 of 39-year property that can be reclassified as personal property. And, in most cases, between 15 and 40 percent of a company’s real property falls into that category.

Rea Partners with Experts

Rea & Associates is affiliated with a group of construction engineering specialists who have training in cost segregation and identify property and building components that qualify for accelerated depreciation. These specialists examine architectural drawings for a company’s facilities and conduct a comprehensive site visit to identify personal property that qualifies for accelerated depreciation. This might include parking lots, computer wiring, or even cabinets.

They’ll also review contractors’ draw requests and change orders, as well as the costs and disbursements incurred by the owner.

Next, the engineers will use construction industry standards to allocate and segregate material components, direct labor and indirect costs.

This step is at the very heart of cost segregation, because it separates costs that are eligible for shorter depreciable lives from those that may be written off using the standard 39-year approach. Proper documentation by experts is critical in cost segregation claims. The IRS scrutinizes claims carefully to ensure their legitimacy. The better quality of your documentation, the less likely you’ll run into problems in the future. Rea’s experts can ensure the appropriate procedures are followed.

Realizing the Benefit

Wetz Warehouse in Marietta is one company to whom Rea has provided cost segregation services. “Rea helped us every step of the way,” said Tag Wetz of Wetz Warehouse. “We were pleasantly surprised by the tax savings we saw. The rewards of this service far outweigh the cost.”

Real estate and construction companies who work with Rea can offer these savings to their clients as well. “It’s a competitive advantage when contractors bidding on a job can provide a cost segregation study to ensure tax savings,” said Tim Michel, former president of Rea.

Michel knows well the benefits of cost segregation since he has had the firm’s newer facilities in Dublin, Marietta and Wooster reviewed. Cost segregation can be performed on brand new buildings or even those 5-12 years old. If the cost of your building (not including the land upon which it sits) is at least $750,000; you’ve purchased, constructed or renovated property in the past twelve years; you plan to retain that property for several years; and you currently have taxable net income, you can probably benefit from a cost segregation study. Just as no two businesses – however similar they may be – have identical situations, every cost segregation study is different.

While this process may provide significant bottom-line benefits to your business, it is not an area for those with limited experience. Talk with your Rea & Associates’ representative to determine if a cost segregation study is an option for you. Cost segregation allows you to maximize your tax savings opportunities and gives your cash flow a substantial infusion.

This article was originally published in The Rea Report, Spring 2005 issue.

Note: This content is accurate as of the published date above and is subject to change. Please seek professional advice before acting on any matter contained in this article.