Cost Segregation FAQs

Frequently Asked Questions

What is Cost Segregation, and how does it work?

Under United States tax laws and accounting rules, Cost Segregation is the process of identifying personal property assets that are grouped with real property assets, and separating out personal assets for tax reporting purposes.  In other words, Cost Segregation is a tax savings tool allowing businesses and individuals to increase cash flow by accelerating deductions and deferring Federal and State income taxes.

What is a “cost seg study”, and why is it necessary?

A Cost Segregation Study is a detailed analysis of a structure/building that reclassifies or segregates its real estate components and improvements to differentiate between real and personal property. By doing so our clients can accelerate the depreciation periods from 39 or 27.5 years to 15, 7, or 5 years, respectively.

HL Cost Seg has developed methods to deliver this same service to commercial property owners at very affordable rates. This means you can take advantage of this tax savings that was once only enjoyed by the owners of exceptionally large properties.

What kind of real estate qualifies?

Property that was:
1.) Purchased, constructed, or remodeled property after Jan. 1, 1987
2.) and that you anticipate holding for at least a few years.

When should a Cost Seg study be done?

It is best to have a study completed for the year the building or improvements are placed in service. However, IRS Revenue Procedures allow taxpayers to “catch up” on the depreciation that was not claimed from the first day the property was placed in service without amending prior years’ tax returns.

Furthermore, the IRS now allows for the “catch up” period all in the first year rather than over four years, when the Revenue Procedure 99-49 was first introduced. A cost segregation study can be performed on any property constructed, acquired or remodeled since January 1, 1987.

What information will be needed?

While each study differs, we generally request the following information, if available:
1.) A current depreciation schedule (usually at the back of your tax return).
2.) Building cost information
3.) Change orders
We can assist you in gathering the necessary data.

How does the study work?

Building costs are generally classified for federal income tax purposes into three categories;

(1) Tangible Personal Property,

(2) Land Improvements, and

(3) Real Property. Each has a different recovery period and method under the Modified Accelerated Cost Recovery System (MACRS).

Our certified cost segregation analysis is performed by professional personnel with in-depth knowledge of construction methods, materials, and building components to properly identify the building elements and improvements that will be.reclassified to take advantage of accelerated depreciation.

Why should I commission a Cost Segregation study?

Without a Cost Segregation Study your accountant will only be able to use straight line depreciation, 39 or 27.5 years. A Cost Segregation Study provides your accountant with accurate information to establish 5, 7, 15, and 27.5 or 39-year lives, which substantially increases tax savings in the earlier years of owning your property.

Will a Cost Seg study trigger an audit?

Absolutely not. Our Cost Segregation Study methodology strictly adheres to the IRS Cost Segregation Audit
Technique Guidelines. If the Cost Segregation Study comes into question, one of our certified Cost Segregation Study professionals will attend the audit per our contract.

Can a study apply to buildings not yet constructed?

No. However, for projects not yet constructed, we can provide estimates on tax savings from your construction budgets. A Cost Segregation Study will be conducted when construction is complete.

Why should I choose HL Cost Seg?

At HL Cost Seg our certified Cost Segregation Study professionals have the expertise in tax law, cases, and rulings on cost segregation, along with real estate development and construction experience to maximize your tax savings. Our company will work with your advisors to help you take advantage of this extremely viable tax savings solution.

I think this may have been done this already, how do I check?

If you think it may already have been done then the chances are it hasn’t. If your CPA had contracted someone to undertake a Cost Segregation Study on your behalf and had got you typical savings of $300,000 – $800,000 then he would have made extra sure that he’d told you and you would most likely remember. If you’re not sure if this has happened then it most likely hasn’t.

My CPA isn't sure this is the right thing for me. How do I know who is correct?

We encounter this a lot with CPAs. Unfortunately, Cost Segregation studies must be performed by a trained Cost Segregation specialist – not a CPA. In addition, they often feel threatened by Cost Segregation firms as most of them are also a CPA firm (although this can often be hidden) – the CPA doesn’t want to lose your account to another firm. Therefore, they often avoid Cost Segregation altogether.

We only do Cost Segregation. We are not a CPA firm. There is no threat to your CPA – we won’t be trying to poach your business from them. Put us in touch with your CPA and we’ll straighten it up and demonstrate how we can all benefit by working together to maximize your tax mitigation and savings.

How can I get this study done for free?

We will undertake an Order of Magnitude Study at no cost or obligation to you. You can then understand the detail as it relates specifically to you and your assets and understand the fixed costs involved.

If you are a Hotel or Villa owner then please see our page that outlines how we will pay for this study for you in exchange for some of your unsold time in your property.

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