Cost Segregation Study reminds me of a game of “telephone”. This is where a number of people playing the game, convey a message, in a whisper, to each other, until you get to the last person who is asked to say the message out loud. This usually results in laughter for the entire group, since when comparing the last person’s response to the original description, you will notice the message is lost, garbled, and often completely altered from the original content. Typically, it only takes about 3-5 “middlemen” for the message to get butchered up. This phenomenon may explain why over the years, misinformation regarding Cost Segregation Studies has disseminated among many commercial property owners, and even some tax professionals.
While there is no shortage of erroneous information, most cost segregation professionals will agree that a rather common, yet frustrating myth in our industry is: “Cost Segregation Study can only be done for a brand new property!”
This is frustrating because:
1) It is entirely WRONG!
2) This mis-perception keeps many well-intentioned commercial property owners from taking advantage of a potentially 6-figure tax benefit!
Case in point: We had a client that owned a commercial building for about 5 years. He and his CPA had discussed hiring a firm to conduct a Cost Segregation Study upon purchasing the property 5 years ago, but then decided against it at the time, since they weren’t expecting a tax liability for the foreseeable future. Since then, despite a positive tax liability, the client’s CPA never mentioned cost segregation again because he believed it wasn’t feasible after the first year of ownership. Fast forward to 2013, we conducted an evaluation for a Cost Segregation Study and found the client qualified for over $120k in benefits!
While it is often best to conduct the study upon acquiring the property, the opportunity is not lost after the first year. Not only is it possible to conduct a Cost Segregation Study years after purchasing the property, but often commercial property owners see a significant, immediate cash flow benefit by doing the study a few years after purchase or construction. Chapter 6.2, of the IRS Audit Techniques Guide, specifically states, “A taxpayer may conduct a cost segregation study on used property and then recompute its depreciation deductions for prior years.” A Form 3115, Application for Change in Accounting Method, must be filed in this case. In addition, IRS Revenue Procedure 2011-14 now allows automatic consent for this change in accounting method, thereby making the process hassle-free!
The bottom line is that owners of hotels, manufacturing facilities, office buildings, apartment complexes, or any other commercial property, can benefit substantially from these accelerated depreciation benefits. However, it is not the right solution for everyone, and many factors go into determining if Cost Segregation makes sense for your property. Learn more about Cost Segregation by visiting www.AcuSolutions.net, and request a FREE, no-obligation evaluation to determine if your property can benefit from a Cost Segregation Study!
