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What is Cost Segregation?

As a result of a tax case, Hospital Corp. of America, et al. v. Commissioner, 109 TC 21, Code Sec. 168, significant up-front tax savings can be realized by owners of commercial and residential real estate, as well as tenants who have made substantial improvements to their occupied space.

Explanation

In a legal memorandum, the Internal Revenue Service (IRS) stated that when the acquisition of real property is supported by proper supporting documentation (i.e., a specialized cost segregation study prepared by a qualified engineer/appraiser), certain portions of the building and surrounding property can be depreciated over a shorter period than the building itself.

The owner receives the ability to expense these assets over 5, 7 or 15 year periods, based upon the classification of improvement. These lives are far shorter than the 27-1/2 or 39 year lives currently applicable to the building itself, and can provide accelerated tax deductions to the owners of the property.

This benefit applies primarily to property acquired after 1986 and must be supported by the required documentation. Any additional expense determined to be attributable to prior years can be utilized in the year of change, providing the basis for significant tax refunds or tax reductions without amending tax returns.