History of Cost Segregation

By: Patrick OConnor | Posted: 04th January 2011

Cost segregation evolved as the result of multiple court cases and IRS rulings. The body of knowledge is summarized in the Audit Techniques Guide (ATG), published by the IRS.

Component depreciation was a prior methodology that produced similar results via separating a building into components. These components often included the roof, plumbing, electrical and elevators. There were concerns some investors were using component depreciation in an abusive manner. As a result of the tax law changes in 1986, tax rates were lowered substantially but many tax reduction techniques (such as component depreciation) were eliminated.

From 1987 to 1996, there was a limited ability to depreciate any portion of a real estate separately. Some owners and tax practitioners experimented with assertions that portions of the cost basis were personal property (Section 1245) and not real estate (Section 1250).

The case for differentiating between personal property and real estate was HCA (Hospital Corporation of America). After this case was determined in 1996, the IRS decided not to appeal it. Depreciating real estate offered more potential for tax deductions and tax reductions.

The following is a summary of some of the items prescribed and the depreciable life in years:

Carpet 5 years
Vinyl Tile 5 years
Interior Signage 7 years
Parking Lot Striping 7 years
Paving 15 years
Landscaping 15 years
Sidewalks 15 years

The IRS has summarized their portion on cost segregation and its practice in the Audit Techniques Guide. While many real estate investors and tax practitioners are unfamiliar with the tax reduction benefits from using cost segregation, the IRS reports it is appropriate as the most accurate method to depreciate real estate.

Cost segregation produces tax deductions and reduces federal income taxes across the country and in every size market. Below are just a few examples of where cost segregation generates meaningful tax deductions.

City:

Baltimore, MD
Atlanta, GA
Miami, FL
Los Angeles, CA
Memphis, TN
Las Vegas, NV
Washington, DC
Philadelphia, PA
New York, NY
Dallas/Ft. Worth, TX
Grand Rapids, MI
Detroit, MI
Rochester, NY
Greensboro, NC
Fresno, CA
Cincinnati, OH
Columbus, OH
Allentown, PA
Oklahoma City, OK
Dayton, OH
St. Louis, MO
Indianapolis, IN
Birmingham, AL
Charleston, SC
Louisville, KY
Lancaster, PA
Riverside, CA
Scranton, PA
Madison, WI
Chattanooga, TN

Cost segregation produces tax deductions for virtually all property types.

Property Type:

Daycare center
School
Bowling alley
Drugstore
Office warehouse
Racket club
Car wash facility
Auto dealer
Auto salvage yard
Skating rink

Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.

Industry:

Furniture stores
Day care facilities
Nondurable good wholesalers
Wood product manufacturing
Building supply dealers
Laundry facilities
Chemical manufacturing
Apparel manufacturing
Automotive repair facilities
Food and beverage stores

O’Connor & Associates is a national provider of commercial real estate consulting services including federal tax reduction, cost segregation, due diligence, renovation upgrading cost analyses, tax return review and apartment inspections.
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Tags: accurate method, cost basis, real estate investors, tax deductions, body of knowledge, federal income taxes