The principal goal of a cost segregation study is to increase cash flow from constructed buildings, purchased properties and renovations by accelerating depreciation deductions. The components of a building are reclassified into their proper class lives according to legislation, case law, and IRS revenue rulings. And substantial tax savings follow from the timing.
Why haven’t I heard of this before?
Cost segregation has existed in its modern form since the late 1960s, but for decades it was offered almost exclusively by Big 4 accounting firms and a handful of large consultancies serving only the largest clients. Only in recent years has it become available, at reasonable cost, to smaller companies and individual property owners.
Is it legal?
Absolutely. Over a thousand IRS revenue rulings and court cases provide the guidelines for properly conducted studies, and the IRS publishes an Audit Techniques Guide defining what a quality cost segregation study looks like. A properly performed study does not automatically increase your chances of being audited. And CORE defends its work in the event of an audit at no additional charge.
What is the benefit actually worth?
The benefit lies in the timing of tax payments. As a working illustration from our library. Assuming a 35% federal rate, an 8% discount rate, half-year convention and no bonus depreciation. Every $1,000,000 of property reclassified from 39-year life has a cumulative present value of tax deferral of approximately:
- $195,000 when reclassified to 5-year property
- $178,000 when reclassified to 7-year property
- $108,000 when reclassified to 15-year property
In other words: roughly $19 of benefit for every dollar moved from thirty-nine years to five. Bonus depreciation, where available, accelerates the benefit further. Current bonus depreciation rules are a conversation for your specific situation.
How a study works
CORE gathers documentation, construction plans, contractor invoices, depreciation schedules, identifies the qualifying items and costs to reclassify, and one of our consultants visits the property to compare what was actually built against the plans. Results arrive as a full report with case law, definitions, photo documentation, and calculation detail. For small to medium projects, the final deliverable typically lands three to six weeks after all information is received.
Do I need to amend past returns?
No. IRS Revenue Procedure 96-31 allows a Form 3115 Automatic Change in Accounting instead of an amended return. And it can catch up missed depreciation from years past. CORE prepares the 3115 for you if you wish.
“Cost segregation studies are a lucrative tax strategy that should be considered in almost every real estate purchase.”
