Cost Segregation Study is the process of separating out the value of your personal property from the value of real property. The non-structural elements of a business as well as indirect construction costs and certain exterior improvements to land may all be considered personal property but are frequently grouped together as part of “land improvements” and thus considered real property assets. By segregating out these items and having them correctly classified as personal property, you can accelerate depreciation in order to achieve tax savings.
Determining whether to conduct a Cost Segregation Study can be a complex question, as you need to ensure that the savings you will realize outweigh the expense associated with conducting the study and the possible risk of an audit and penalties. The Lotzar Law Firm, P.C. can help you to evaluate your situation and to determine if a Cost Segregation Study would be beneficial based on the specifics of your investments and assets in personal and real property.
Understanding a Cost Segregation Study
A Cost Segregation Study can be performed on buildings that have been purchased, constructed, remodeled or expanded. The building must have been purchased or work must have been done after 1987.
The study will be performed by reviewing architectural drawings, mechanical plans, electrical plans and blueprints of the building. The goal is to identify and separate out personal property and assets from the fixtures of the land that constitute real property. Soft costs, such as expenditures on architecture or engineering fees, are also considered in the Cost Segregation Study and are distributed among the different components of the building.
Once the personal property is identified and separated out, depreciation can be accelerated when filing income taxes in order to achieve tax savings. Tax payments will generally be lower earlier in the life of the property when a Cost Segregation Study is performed, which can free up funds for investing or for maintaining operations when a business is relatively new.
However, a Cost Segregation Study is not always worth it, despite the tax savings. It is essential that the savings be worth the expense of having the Cost Segregation Study performed. The study should be performed by an experienced professional, such as a construction engineer, in order for the Internal Revenue Service to accept it as proper documentation. You will need to pay the fees for this professional to protect yourself from an audit and to ensure that an accurate assessment is made of the value of personal property.
An experienced real estate attorney at the Lotzar Law Firm, P.C. can help you to decide if you should conduct a Cost Segregation Study in Scottsdale and can guide you through the process while advising you on benefits and risks. Call today to learn more.
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