What is the purpose of a cost segregation study for your real estate investment?
The concept of cost segregation as a tax reporting strategy allows us to identify and reclassify certain real estate property assets so that we can shorten the tax life of these assets for taxation purposes. This allows for a reduction in current income taxes.
How do you know if you have a quality, IRS compliant cost segregation study & report?
As with so many tax related questions we go straight to the source on this, or to the IRS itself.
The study & the report are 2 different parts in the cost segregation process. This article is about the 13 key elements for a quality cost segregation study. Learn about the 13 key elements for a quality cost segregation report.
We’ll start first with the 3 main areas that every cost segregation study & report needs to have.
What are the 3 Main Areas of a Cost Segregation Study & Report?
The IRS holds that there are 3 main areas that every cost segregation study & report needs to include. It should:
Classify assets into property classes
Explain the rationale (including legal citations) for classifying assets as either § 1245 or § 1250 property
Substantiate the cost basis of each asset and reconcile total allocated costs to total actual costs
What defines a quality, IRS compliant cost segregation study?
Your cost segregation study must be accurate & well documented in regards to the 3 main points above.
“Quality studies greatly expedite the Service’s review, thereby minimizing the audit burden on all parties.”
— IRS
What are the 13 key elements in a quality, IRS compliant cost segregation study?
These 13 elements in your cost segregation study help to be characterized as quality report, as defined by the IRS, and include:
Preparation by an individual with expertise and experience
Detailed description of the methodology
Use of appropriate documentation
Interviews conducted with appropriate parties
Use of a common nomenclature
Use of a standard numbering system
Explanation of the legal analysis
Determination of unit costs and engineering “Take-Offs”
Organization of assets into lists or groups
Reconciliation of total allocated costs to total actual costs
Explanation of the treatment of indirect costs
Identification and listing of § 1245 property
Consideration of related aspects (e.g. I.R.C. § 263A, Change in Accounting Method And Sampling Techniques)
How Do I Ensure My Cost Segregation Study is a quality, IRS compliant Study?
We include all 13 of these key elements in every cost segregation study we perform so we can discuss with you how to ensure your cost segregation study meets these requirements. Reach out to us to start a conversation & request a complimentary tax savings estimate for your real estate property. We need a few details about your property & then we can have a tax savings estimate sent your way so you can decide whether cost segregation makes the most sense for your investment property.