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Increase your Cash Flow with Cost Segregation

A cost segregation study can increase the cash flow from your real estate investment by  accelerating the rate at which your property is depreciated.  Most buildings that are depreciated as non-residential real property are depreciated over 39 years. The buildings include many components, such as electrical wiring beyond basic building requirements, land improvements and mechanical systems that can be depreciated as personal property with a shorter life (typically five or seven years) and an accelerated method of depreciation. By identifying components with shorter lives, you can increase the depreciation during the initial years of a real estate project, which reduces taxes and thereby improves your cash flow. 

Cost segregation studies can be performed after new construction, a major capital improvement, or a property acquisition. They can also be performed for buildings already in service even though they have been depreciated using the longer lives and methods. This is typically referred to as a look-back study. Through a look-back study, the depreciation is recalculated based on the shorter depreciation lives.  

A cost-segregation study is a formal document that identifies the assets that can be depreciated independent of the building. Cost segregation studies are carried out by a specialist trained in construction engineering and tax law. Since there is no official IRS pronouncement for cost segregation, specialists often review the Audit Techniques Guide (ATG) which examiners review on this issue. The specialist can also review several revenue procedures, rulings, and cases relating to component depreciation.

During a cost segregation study, the specialist will conduct an on-site inspection and identify all components that can be separately depreciated. They will then compute the costs for each component, based on several methods, most of which are engineering-based approaches.  All aspects of the property, including the time period it was purchased and the location of the asset, are included in the computation of the costs.

If you own commercial real estate, you should consider a cost segregation study through a quick discussion with your tax advisor. You may discover an opportunity for increased cash flow that is well worth the study. For more information regarding cost segregation and Blackman Kallick’s role, see Real Estate Cost Segregation on our website.

For further information please contact John Barsella at jbarsella@BlackmanKallick.com or 312-980-2905, Micah Wheat at mwheat@BlackmanKallick.com or 312-980-2949 or your Blackman Kallick representative.
Our thanks to Gianna Melone for her contribution to this article.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.