Prior to April 1999 current tax code required all residential real estate be depreciated over 27.5 years, and all commercial real estate be depreciated over 39.5 years. Now, however, if you have a Cost Segregation Study prepared by a qualified professional, you can depreciate the portion that is business personal property over 5 to 7 years and land improvements (curbs, sidewalks, etc.) over 15 years.

It greatly reduces your taxable income in the early years and saves you tax payments. On the average, for every $1,000,000 of 39-year property reclassified to 7-year property, the present value (at 8% and without compounding) of the net cash flow of tax savings is approximately $200,000.

No. It is only beneficial to those who have income that can be sheltered by additional depreciation. Also, it may not be beneficial to those who will only own the real estate for a short time, or who placed their property in service prior to 1986.

True. However, a Cost Segregation Study in effect gives you an interest free loan from the government for the first 15 years, which you will then repay interest free over the remaining 25 years. Wouldn't you rather hold your money? Have the cash now to reinvest it!

On average, the total fee will generally fall between 10% and 20% of the estimated net present value of tax savings. This can be affected by the size the real estate project and the type of building and improvements. In addition, the location, accessibility, and quality of the records and documents affect the ultimate cost.

Certain types of commercial property can be grouped together to give an idea of the percentage of those types of buildings that have been eligible for accelerated depreciation. Your results may be greater, or they may be less than those quoted here, but in general, property that falls into one of these categories is most likely to result in accelerated depreciation within these ranges. See below.

A complete set of construction plans, current tax depreciation records, building cost budget information, final AIA application and documents of certification for payment or other cost information, change orders, and direct and indirect costs paid by the owner that are not included in other documents.

A cost segregation study can still be done through an extensive site visit, measurement, and inspection using currently accepted costing techniques and pricing guides to determine costs that qualify for shorter recovery periods.

No, it can be done for any building that you placed in service in 1986 or later.

No, you can claim deductions prospectively over the next four years without going back to amend prior years tax returns.

We are not interested in breaking up relationships, but we would ask how strong is your relationship if, after more than two years, your CPA has not suggested that you take advantage of such an obvious no-brainer? In addition, we know of no other CPA practice in the region who can match our expertise in the development and construction industry. By getting us involved early in a project, we can suggest strategies that will help you maximize your cost segregated deductions.

Just contact Rick White. You can reach him by email at rwhite@hoffmanwhite.com or call him at 434-973-5474, extension 225.

Section 263(A) Inventory Allocations