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How Cost Segregation Works
Typically, a building’s basis or cost, excluding land, is depreciated over 27.5- or 39- years, which is known as the straight-line method. This method is the default position of most tax professionals. However, there is an alternative called cost segregation, which takes the parts and pieces or components of the building and separates them. Each component is depreciated on its individual useful life instead of taking all the assets and depreciating it under the structure of the building.
Cost segregation is based on a tax court action from 1997 between the Hospital Corporation of America (HCA) and the IRS. The HCA triumphed in the landmark case, and cost segregation could no longer be challenged.
Cost segregation is the process of analyzing and identifying 1245 personal property and 1250 real property. The 1245 property that is eligible for shorter class lives is then depreciated separately from the building structure. Moving assets into a shorter class life will create a large depreciation expense, which reduces income, thus reducing income taxes. This provides a significant tax benefit for the taxpayer.
Property Eligible Under Cost Segregation
Code Section 1245 personal property consists of items such as:
These and many other items that are inside the building can be depreciated over five years. The principal characteristic of 1245 personal property is that it is readily movable rather than permanently affixed.
Land improvements are also identified under cost segregation. Land improvements have a 15-year class life and include parking lots, curbing, landscaping, sidewalks, exterior signage, and more.
New construction is not the only circumstance when cost segregation can be performed. Routinely, cost segregation studies are performed on buildings that have been in service for ten years or more. Any buildings with a remaining depreciable basis are potential candidates.
Contact CSSI® for Cost Segregation
Let CSSI® provide you with an engineering-based cost segregation study to increase your cash flow significantly.