Cost Segregation Study FAQs
If your business owns residential or commercial property or acquires or develops real estate (including as a lessee making tenant improvements), performing a cost segregation study can be an effective way to help your business maximize its depreciation deductions and minimize its tax burden. However, these studies are often overlooked simply because many businesses are unfamiliar with them and the types of savings they can potentially provide.
Following are our answers to frequently asked questions about cost segregation studies.
What Is a Cost Segregation Study?
Cost segregation studies are a strategic tax planning strategy that can be applied whenever a taxpayer has constructed, purchased or improved any real estate. Cost segregation studies allow a taxpayer to increase cash flow through accelerated deductions, thereby deferring tax liability.
Why Should I Perform a Cost Segregation Study?
Accelerating deductions and increasing cash flow are some of the primary benefits of performing a cost segregation study. In addition to the initial increased cash flow, cost segregation studies can be used to determine the units of property and components of buildings and leasehold improvements to use in the case of future repairs, partial dispositions and retirements.
One of the primary goals of a cost segregation study is to separate assets by class life, such as:
• 27.5- or 39-year
• 15-year
• 7-year
• 5-year
The benefits of a cost segregation study greatly exceed the cost of performing a study for a commercial renovation, a residential renovation of more than $100,000, or any property purchased or constructed with a value of more than $750,000.
At Creative Planning, we employ individuals with construction and tax expertise to develop high-quality cost segregation studies for our clients. As a tax provider, we can even incorporate the estimates and results into the client’s overall tax planning strategy.
What Qualifies for a Cost Segregation Study?
Any property that has been purchased, constructed or renovated in the past 15 years can potentially qualify for a cost segregation study, regardless of the type of business using the building.
How Can a Cost Segregation Study Potentially Help Me?
Cost Segregation studies, or fixed asset analyses, can be done at various stages in the building ownership life cycle. As an example, let’s look at a hypothetical medical office property purchased for $1,500,000 in December 2024.
Without a cost segregation study, the purchaser must allocate a portion of that purchase price to land — we’ll use $225,000 as an example. The remaining cost would then be depreciated over 39 years. Because the property was purchased in December, that depreciation could be as little as $1,362.
By including Creative Planning in the process, we can look at the value of the various components of the building and determine how much of that depreciable property could be recovered over a shorter period of time (most commonly 15, 7 or 5 years).
Let’s say a cost segregation study performed on our hypothetical building allocated $102,000 to 15-year land improvements and $216,750 to personal property with a 5-year recovery period. In this same hypothetical property, the tax deduction could be $211,652 for the 2024 tax year (after factoring in the “bonus” depreciation rate at 60%). If we assume a 37% tax rate, the actual cash saved would be $77,807. How could you grow your business or portfolio with an additional $77,807 available over the next year?
In addition to providing value upon the initial acquisition, we also help our clients with other deductions related to fixed assets as described below:
- We can assist by valuing disposed property during major renovations and performing a study on the newly capitalized assets.
- We can aid in determining whether or not money spent on your property need to be capitalized or if they can be expensed as a repair.
- In construction or renovation projects, we can evaluate the application of credits and deductions available for energy-efficient assets.
We’re here to help our clients during any phase of fixed asset ownership. With all the available methods to qualify for deductions, we can help you determine the most advantageous path forward.
Are There Any Drawbacks to Performing a Cost Segregation Study?
There are two main drawbacks to performing a cost segregation study:
- They take time. Depending on the unique circumstances and size of your property, the results of your cost segregation study may not be ready for several weeks.
- They aren’t free. Fees will vary, as they’re based on the facts and circumstances of the individual property or portfolio.
Do I Need to Consult With an Advisor?
Performing a cost segregation study on your own isn’t feasible, because it requires a team of tax advisors and engineers to work together in order to decide which components of your building should go into each category and how much each individual element costs.
Creative Planning Business Services helps clients identify tax deductions related to fixed assets as one of our tax service offerings. We’ll not only help you optimize your tax planning strategy but can also perform the tax compliance work so that you can focus on other pertinent business needs. If you’re curious about utilizing tax deductions as part of your business’s tax strategy, we’d be happy to assist you with a complimentary benefit estimate. Schedule a meeting today so that we can learn more about your business.
