Cost Segregation Study
What is a Cost Segregation Study?
Is a Cost Segregation Study Beneficial?...
A Cost Segregation study (also referred to as a cost segregation analysis,
cost segregation or cost seg) is the process of identifying
real property costs, typically in new construction or acquisitions.
The objective is to accelerate depreciation for tax purposes. Cambridge
Partners & Associates works with you to help minimize your taxable income through
rigorous, aggressive and substantiated cost allocation strategies.
A business that has recently remodeled, constructed or acquired real
estate can benefit from a cost segregation study. This type of
study allows you to reduce your taxable income for the next several
years. A cost seg study can have a dramatic impact on cash
The current depreciation rules, Modified Accelerated Cost Recovery
System (MACRS), require that a newly acquired or constructed building
be depreciated over 39 years on a straight-line basis. Under certain
circumstances, MACRS allows for the reallocation of a portion of the
property into asset categories having shorter depreciable lives (e.g.
5, 7, and 15 years).
The objective in performing a cost segregation analysis
is to shift property (and the associated dollars) from categories,
which have long tax lives to categories, which have shorter tax lives.
This allows for greater depreciation during the early years of the
asset’s life, thereby lowering taxable income and thus lowering
taxes. The result is improved cash flow.
How a Cost Segregation Study Works
A cost segregation identifies construction components that are
necessary for the operation of the business rather than construction
components that are required for the operation of the building.
The pure building components must be depreciated over 39 years (27.5
years for apartment type buildings). HOWEVER, the building’s
construction components that are required for the operation of the
business can be depreciated over a shorter period (usually 5, 7 or
15 years). The shorter asset lives increase depreciation in earlier
years, and increased depreciation results in lower taxable income
in these early years.
Cost segregation does not eliminate the taxes owed. Cost segregation
defers the taxes owed to later years. This results in significant
savings today! The after-tax savings can be well in excess of twenty
times the cost of the study.
Following is a hypothetical example:
- The assumed state and federal tax rate is 40% and the assumed
discount rate (cost of capital) is 12%.
- The building, either new or acquired, cost $5,000,000. A cost
segregation study reclassified this cost as follows: 39 year property:
$4,000,000; 15 year property: $250,000; and 7 year property: $750,000.
- Based on these assumptions, the present value of the after-tax
estimated savings are more than $180,000. You can put these cash
savings to work for you now!
Who benefits from a Cost Segregation Study?
If you would like additional assistance or would like to discuss a potential cost segregation
analysis project, please contact Cambridge Partners & Associates
for an initial evaluation consultation.
Among the types of property that will yield tax-saving benefits
are manufacturing facilities, R&D centers, computer centers,
medical facilities, office buildings, hotels, shopping centers, apartment buildings, assisted-living apartments,
movie theaters, casinos and retail facilities.
Study - Frequently Asked Questions