To round out our series on free tools for cost segregation, I’m going to focus on two more info-gathering tools. The first is Redfin, another great database for gathering the info you need for your client’s properties. The second is Google Forms, which gives you an easy and standardized way to gather information from your clients. 

Like most cost segregation tools, these are all about getting the information you need faster and easier. Once you have this information, you can easily plug it into SegStream Pro for an automated cost segregation study. The trick is simply getting the information. Let’s start with RedFin. 

Redfin: The best free tool for residential cost segregation studies

Redfin is my favorite lookup tool for residential properties. There are other tools like Zillow, but I only use them as a backup. That’s because the information in Redfin is laid out in the most efficient way for collecting cost segregation study data. 

All of these sites give you the information you need on beds, baths, square footage, etc., but Redfin gives you a lot more in a nicely laid-out format. My favorite section is the ‘property details’ section. This is where they lay out everything they have on the property, and they tend to have deeper information than other sites here. 

You’ll notice in the screenshot that Redfin has a treasure trove of information you can use to find components that you can separate out for cost segregation. Beyond the lot size, they’ll list items such as sprinkler systems, roof types, appliances, fireplaces, types of floors, and exterior features—all of which you need to know for cost segregation studies.

Keep in mind that Redfin can get stuff wrong sometimes, so if you’re unsure of something verify it with your client. That brings us to our next tool which helps you get the information you need from your clients.

Google Forms: Create a standardized way to get the client info you need

Getting the information you need for a cost segregation study doesn’t have to be a burden. It also doesn’t have to be difficult to get that information into a usable format, because Google Forms helps solve both of those problems. 

Google Forms is the ideal free tool for creating client intake forms. You simply create a new form and add questions for a new client to fill out. This can include client name, entity name, property address, property type, etc. 

For a field such as ‘property type’, you can give your clients options to pick from rather than have them type it out. This helps standardize your form and avoids people saying the same thing in two different ways (e.g. hotel/motel or assisted living/hospice).

You can also choose to make fields required so you’re guaranteed to get the info you need. The example below shows how to set up a ‘property type’ field. Note that it’s in alphabetical order so it’s easy for clients to find their property type.

Once you gather the information from your form, you can easily export it to a usable spreadsheet. From that spreadsheet, you have all the data you need ready to be copied and pasted into other tools, such as SegStream Pro. So not only does it solve the data collection problem, but also the data formatting. For example, if you had clients fill out a paper form you’d be stuck typing the info from the form into a spreadsheet or SegStream Pro. This bypasses that. 

What’s great is that you can use this form over and over for each new client. You can tweak the form over time to add new fields that you need to collect or subtract fields you don’t need. You can also see reports based on your responses. For example, you could see a pie chart of the different property types your clients selected from the image above. 

Google Forms has tons of flexibility. Not only can you generate a spreadsheet, but you can also use integration tools like Zapier to connect it to your customer relationship management (CRM) system or other systems.

Faster cost segregation studies: What these free tools are all about

All of the free tools we’ve laid out in this blog post series, not just Redfin and Google Forms, are all about the same thing: getting you all of the info you need to do cost segregation studies faster and more efficiently. 

The reason I’m showing these particular tools is that they are all organized in a way that makes it easy to punch in the data to SegStream Pro. They all fit hand and glove with our software so you can quickly get the information you need, copy and paste it in, and have your cost segregation study done in hours instead of weeks—without sacrificing quality. 

Interested in learning more about SegStream Pro? Request a free live demo and we’ll show you how you can use it to grow your business.

Cost segregation studies can be done much faster when you don’t need to repeatedly ask your clients for tidbits of information, and tools like ReGrid help you avoid just that. When I need to look up some information on a client’s parcel for a cost segregation study, ReGrid just about always has what I need to know. 

In this blog post, I’ll teach you how to use ReGrid to fill in the gaps for free. 

ReGrid for parcel outlines

One of the nicest things about ReGrid is that it provides an exact outline of 99.9% of all properties in the US that you can rely on. The company has collected and standardized data from government records and other authoritative sources and then combined it all into one easy-to-use database with over 156 million land parcel records. It provides you with up-to-date information on each parcel for free, but you can pay more for premium data. 

One question that often brings me to ReGrid is, “Where does my client’s parcel begin and end?”. This is often hard to tell based on just the address alone, especially when a property comprises multiple structures.

For free, ReGrid gives you an exact and reliable outline of where your client’s parcel begins and ends. Using this outline, you can draw lines using the ruler and polygon tools in Google Earth to get area and perimeter information for separate property components. 

Here, you can see our example property in Santa Monica, CA, with the exact parcel outline provided in ReGrid. I recommend using the map view rather than the satellite view for this, as the satellite view sometimes gives imperfect edges. However, you can easily adjust for that in Google Earth when you draw your lines.

Uncovering helpful property info (for free)

Another benefit to ReGrid is that it gives you abundant information on the property, even in the free version. Some of this information that’s useful for cost segregation studies includes the last sale price and date, parcel value, improvement value, and land value. 

You can see this info for our Santa Monica property. With the data given, you can find out how much you can depreciate based on the ‘improvement value’. For this property, the improvement value/total value is actually pretty low, about 2%, so it’s not a great candidate. However,  this is valuable information to know and is easy to fetch from ReGrid.

You can also see the ReGrid calculations for square feet and parcel sizes and a legal description of the parcel. This may even save you a trip to Google Earth Pro, or at least provide you something to compare your own measurement against for accuracy.

Additional info that can be useful

ReGrid goes on and on with data that may or may not be useful for cost segregation studies, but it’s worth a look. Anything that can save you time will also save you on labor costs. It can also answer potential questions that you’d need to ask your client about directly. They probably won’t enjoy thumbing through their records, so it’s nice to have this info directly from ReGrid.

Below, you can see some potentially useful information about the property in Santa Monica. This includes square footage for different areas within the property, when each building was built or changed, and various building codes that may or may not be applicable or useful. This is just a sampling of all the info that ReGrid provides. 

ReGrid Pro: Worth it for cost segregation?

While much of the information you need for cost segregation studies is available for free, signing up for ReGrid Pro could save you some time and eliminate the need for using multiple free tools. 

For $10/month or $100/year, ReGrid Pro enables a full suite of mapping tools and map layers that would eliminate the need to use Google Earth Pro. Some of the most useful layers are parcel dimensions and building footprints, so you wouldn’t need to gather that data from other tools. While it’s not necessary, it is cheap, so perhaps it’s worth the small fee to save your time.

However, this blog post series is focused on free tools. There are a couple more free tools that we’ll dive into next. One is another property lookup tool that can fill in the final gaps and save you more time. The other makes it easier for you to gather information from your clients.

Complete Your Cost Segregation Studies Today

SegStream is a simple and easy-to-use software solution that helps CPAs, specialty tax firms and tax experts grow their businesses by completing more cost segregation studies in less time.

Schedule a demo today and learn how SegStream can help you grow your business.

LoopNet: A lot of the info you need for cost segregation studies

LoopNet is a site to browse commercial properties and businesses for lease or for sale. If a property is listed on LoopNet, it will include all kinds of useful information, including square feet, assessed value, pictures, and more. 

Just about any commercial property that’s listed for sale or lease will make its way onto LoopNet. After a sale or lease has taken place, the website will ‘archive’ the information from that property and leave it up on the site. So, even if the property is not currently for lease or sale, you can still use this site to look up much of the information you need to start a cost segregation study. 

Free LoopNet photos to get you started

One of the greatest benefits of LoopNet is all the photos that are left up on the site. You may not have every photo you need to identify every available component for your study, but you might be able to get pretty far.

LoopNet often has solid pictures of the exterior, building features, and interior of your building. If you either don’t have time or are unable to do a site visit, you can use these photos to identify what elements you can separate out for individual depreciation for your cost segregation study. Or, you can use them as a guide to finding components you need more information or better photos for, and then have your client take the photos for you if you can’t make it on-site. 

Nothing can replace using your own photos in a cost segregation study, but LoopNet is definitely second best. As an example, there are numerous photos of this property at 700 Colorado Ave in Santa Monica, CA. You could reasonably use these to conduct the majority of your cost segregation study, as you can easily identify individual elements and structures within them.  

Check out just a few of them below. 

A treasure trove of free cost segregation data

If your property was ever listed on LoopNet, you can use the site as the starting point for gathering all of the information you’re going to need. If you’re using SegStream Pro to do an automated cost segregation study, you can simply take the information from LoopNet and plug it into our system. It may not have all the information you’ll need, but it’s a great way to get started and can save you hours compared to gathering this manually. 

Below is an image on LoopNet from the same property in Santa Monica. Notice how it has useful information regarding the property type, square footage, tenancy, parking, year built, and number of drive-in doors.

PDF brochures to help you do a deeper dive

Many properties will also have downloadable PDF brochures that contain more useful information on the property. While these are designed to help sell the property, they contain data you’ll need to plug into your cost segregation study. 

The screenshot below is taken directly from the downloadable brochure from the same Santa Monica property. Note how it shows how much of the property has been improved, including a breakdown of square footage for concrete and masonry improvements. It also shows how much parking is available. Lastly, it shows how much frontage there is along each street, which is useful for breaking down curb space as a cost-segregation component.

Save time and start with LoopNet

Without fail, I always start my cost segregation studies with a quick search on LoopNet for my property. Much of the time, I hit the jackpot and get much of the information I need to get started and save hours on tedious info-gathering tasks. This isn’t a guarantee, but it is well worth it. 

In our next article, I’ll teach you how to use another info-gathering tool that can supplement LoopNet and Google Earth Pro to piece together missing data for your cost segregation studies (and it’s also free!).

Complete Your Cost Segregation Studies Today

SegStream is a simple and easy-to-use software solution that helps CPAs, specialty tax firms and tax experts grow their businesses by completing more cost segregation studies in less time.

Schedule a demo today and learn how SegStream can help you grow your business.

Much of your cost segregation study process is simply gathering information. You can do this the old-fashioned way, with site visits and a measuring wheel, or you can use free online tools to save yourself the hassle. 

One of the most useful tools for cost segregation studies is Google Earth Pro. In this blog post, I’ll teach you how to set up and use Google Earth Pro to take care of all the measurements you need to conduct cost segregation studies. This will save significant time and costs compared to taking these measurements yourself. 

Let’s start with setting the tool up. 

Tips and tricks: Setting up Google Earth Pro for Cost Segregation

Google Earth Pro for desktop is free to download and use for both Windows and Mac. You’ll want the desktop version so you can save data and easily share Google Earth files, but you can also try out the mobile and online versions for fun. 

Once you download the program and get it installed, you’ll want to make a few quick changes to make sure it’s properly set up for cost segregation study measurements:

1. Go to ‘Options → Navigation → Slide Tool Speed’, and set it as fast as it goes. The slide tool defaults at a frustratingly slow speed, so you’ll want to change this before you get started with anything else. You’ll also want to update the ‘Mouse Wheel Speed’ to the fastest setting, as the same issue applies. 
2. Turn off the ‘Automatically tilt and enter ground level view’ setting. This is great for looking at architecture, but it won’t help with measurements that need to be taken from directly above. 
3. Check off unnecessary layers such as ‘roads’, which displays data from Google Maps traffic. You won’t need these layers for cost segregation purposes, and they just get in the way. Pretty much all layers can be turned off. 
4. Make the ‘Places’ sidebar bigger, this will be important and you’ll need to see the data displayed here. 

Once you’ve changed these settings, you can start looking up properties you need to take cost segregation study measurements for. First, look up the property address in the search bar. When it comes up, right-click on the property and save it to ‘My Places’.  

Now, zoom into the property from a nice height where you can easily measure it, and ensure you’re looking at it from directly above (which is the 2D setting). Then, you can use the compass tool to square up the property with as close to straight lines and 90-degree angles as you can get. This makes it easier to measure using the ruler tool.

When you have this nice, map-like view of the property, right-click on the property and hit ‘snapshot view’. Now, whenever you double-click on the property from your places bar, you’ll come back to this nice, measurable view. 

The last thing we’ll do before taking measurements is to right-click, add a folder, and name the folder something related to the property, such as the address, client name, or however you want to identify it. You’ll save all the measurement data and markups here. 

Essential Google Earth Pro Tool #1: Ruler

Now, it’s time to start measuring. With the Ruler tool, you just need to click on a point to start a new measurement. As you click on more points, the ruler will automatically draw lines between points until your measurement is complete. If you make a mistake, then you can right-click and it will send you one point back so you can re-do your point measurement. 

After you’ve drawn a complete shape, you will get the area in square feet and the perimeter in linear feet. Once you have your complete property measured, save it as ‘site footprint’ in the folder you created for this property. Now, you have your site’s area and perimeter, plus you can show how you measured it in Google Earth if the question comes up in an audit. 

Essential Google Earth Pro Tool #2: Polygon

Now that you have your site footprint mapped out, you’ll want to measure elements within your property using the ‘Polygon’ tool. This tool is essentially an extension of the ruler but measures shapes within your footprint. You’ll use this to measure components like parking lots, curbs, skylights, grassy lawns, and anything else you’d want to separate as a component for your cost segregation studies. 

Let’s say you want to measure your parking lot. Using the Polygon tool, you can draw points to measure your parking lot within your site footprint. Then, you can save that shape as ‘parking lot’. Do this for all of the components you need to measure within your building’s footprint. 

Saving Google Earth Pro data for reference and sharing

Now that you’ve measured your entire footprint and each component within it, you should see the area and perimeter for each in the property folder. When saving these, it’s helpful to use abbreviations so you don’t take up too much text space with titles. That way it’s easier to see the area and perimeter data that you need for your study. 

At a glance, you can see the area and perimeter for all components of your property in your folder. When entering your property into SegStream Pro to conduct an automated cost segregation study, you can simply copy and paste the data from Google Earth into SegStream Pro. 

You can also share the property data with others who use Google Earth. If you want to share this information with your client, for example, you can download the folder by clicking ‘Save place as’, which saves the folder as a .knz file. If your client has Google Earth installed, they can open this file and automatically see the markups you made for the footprint and each component of the property, as well as the area and perimeter. All the shapes and measurements are there so that they can easily double-check it for accuracy. 

And that’s it! Google Earth Pro is a powerful free tool for making measurements for any property, anywhere, at any time. Not just for the site footprint, but for individual components too.

Next, we’ll talk about another popular tool that can save you time with photos and building information. 

Complete Your Cost Segregation Studies Today

SegStream is a simple and easy-to-use software solution that helps CPAs, specialty tax firms and tax experts grow their businesses by completing more cost segregation studies in less time.

Schedule a demo today and learn how SegStream can help you grow your business.

Discover how cost segregation studies can maximize tax benefits and unlock hidden value in real estate investments. Learn about the process, benefits, and examples of cost segregation studies in this blog post.

What is Cost Segregation?

Cost segregation is a strategic tax planning tool used by real estate investors and their CPAs to accelerate depreciation deductions on commercial properties (including residential rentals).

By identifying and reclassifying assets within a property from real property to land improvements and personal property, cost segregation studies allow a shorter depreciation recovery period for those “segregated” assets. This can result in significant tax savings for the investors/property owner in the near term.

Traditional real property depreciation typically spans either 27.5 years, for residential rentals, or 39 years for all other commercial properties. By employing a cost segregation study, however, assets can be reclassified to shorter recovery periods, for example, 5, 7, or 15 years, and that’s before any bonus is taken.

From September 2017 to the end of 2022, for instance, bonus rules allow all assets built or bought during that time period, and being depreciated under recovery periods of 20 years or less, to take 100% depreciation in the first year. This means that the sum total of 5,7, 15 or any other recovery period identified in a cost seg can be deducted as an expense in year one.

Considering that Cost Seg studies are often identifying as much as 40% (sometimes more) of property assets (by value) into recovery periods that are 20 years or less, the tax savings can be incredibly substantial.

The Benefits of Cost Segregation Studies

Cost segregation studies offer several compelling benefits for real estate investors.

As outlined above, they provide immediate tax savings by front-loading depreciation deductions, resulting in substantial reductions in taxable income (especially when bonus applies). By doing this, investors are freeing up additional cash flow to be reinvested or used for other business purposes.

Furthermore, cost segregation studies, when implemented at the strategy level, can improve metrics on investment properties, e.g. by increasing after-tax income, making some deals more lucrative/attractive than they otherwise would be.

How Does a Cost Segregation Study Work?

Cost segregation studies are detailed analyses of a property’s components and associated costs.

The studies identify assets which qualify for shorter depreciation recovery periods by analyzing them in reference to IRS regulatory publications, established case law, and industry best practices.

These comprehensive studies provide a thorough breakdown of the costs associated with all segregated assets, allowing for precise reclassification and optimization of tax benefits.

Real-Life Examples of Cost Segregation Studies

To better understand the impact of cost segregation studies, let’s consider an example.

Suppose a business owner purchases a commercial property for $1 million. They expect to depreciate the entire amount over 39 years. However, through a cost segregation study, it is determined that $250,000 of the property’s value can be reclassified as a shorter-life asset. These shorter-life assets are eligible for recovery periods much shorter than the long-life recovery period, for instance: 3,5,7, and 15-year depreciation recovery periods.

Depending on the specific reclassification results, this can result in significant tax deductions and increased free cash flow over the long term.

Cost Segregation Services: Hiring the Experts

While the concept of cost segregation may seem straightforward, conducting a thorough and accurate study requires specialized expertise.

Hiring a professional cost segregation service ensures the study is conducted in compliance with the latest tax regulations to provide the maximum tax benefits. These services have a deep understanding of cost segregation methodologies and can navigate the complexities of the process, ensuring a comprehensive analysis tailored to your specific property.

This results in optimal study results that are robust to IRS audit.

Making Informed Decisions with Cost Segregation Studies

By conducting a cost segregation study, real estate investors gain valuable insights into the financial impact of their property. These studies provide a detailed breakdown of asset costs, allowing investors to make informed decisions regarding asset management, refinancing, and even future acquisitions.

With a clear understanding of the components and their associated values, investors can optimize their tax strategies and enhance their overall investment performance.

Conclusion

Cost segregation studies are a powerful tool for real estate investors and business owners seeking to unlock hidden value and reduce tax liability. By accelerating depreciation deductions, these studies provide immediate tax savings, enhance cash flow, and maximize return on investment. 

To fully harness the benefits of cost segregation, it is advisable to engage a professional cost segregation service with the expertise and technology to conduct the highest level quality studies. 

Complete Your Cost Segregation Studies Today

SegStream is a simple and easy-to-use software solution that helps CPAs, specialty tax firms and tax experts grow their businesses by completing more cost segregation studies in less time.

Created by a team of architects, engineers, and Cost Seg professionals, SegStream provides IRS audit-proof cost segregation studies in hours NOT days.

With SegStream, you can complete cost seg studies with no previous cost segregation experience but if you consider yourself a pro, SegStream will turbo-charge your study production efficiency.

Schedule a demo today and learn how SegStream can help you grow your business.

In our last post, we explained what a cost segregation study is as well as the benefits a cost segregation can provide the taxpayer.

In this post, we’ll focus more on how to conduct a quality cost segregation study and the steps involved in the process.

Cost Segregation Study Methodology and Best Practices

Cost segregation studies do not significantly increase the likelihood a property will come under audit; however, should they come under audit, and the study was conducted poorly or improperly, the taxpayer could be liable for penalties and recapture. The bottom line is that the segregation of property into Section 1245 and Section 1250 assets must not only be worth the time, effort, and money involved in the process but they also must be worth the risk. Sound Cost Segregation methodology can virtually eliminate this risk.

While there is no prescribed framework for conducting a cost segregation study, the following steps can help to ensure a quality cost segregation study:

1.  Cost/Benefit Analysis

Before you decide to conduct a study, sit with your CPA and crunch the numbers. Pour through your depreciation schedules, identify any gaps in your documentation, and evaluate the deprecation benefit against your future business plans to determine whether the investment is beneficial in the long term. For example, if your business involves the regular purchase and resale of real estate, your CPA can help you decide whether or not depreciation recapture will negate the benefits of cost segregation. That being said, even in the case of recapture, the present day cash value of the benefit as an interest-free loan from the government could easily be sufficient enough benefit to conduct a study.

A pre-study cost-benefit analysis can shed light on the pros and cons of conducting a cost segregation study on the property in question.

2.  Hire an Expert

Cost Segregation Studies require extensive engineering analysis of real estate assets. Detailed knowledge of various building types and their corresponding components is prerequisite for a quality Cost Segregation preparer. Studies conducted by a structural, construction, or any type of engineer really should be viewed as much more reliable than those conducted by a non-engineer. And if the preparer is also knowledgeable about tax law, cost estimation, and value allocation all the better.

Preparers should be an expert in the field of cost segregation analysis and have the credentials and references to prove that expertise.

3.  Organize your Documentation

Quality Cost Segregation studies require a rigorous allocation of costs amongst the various asset categories to achieve optimal results. Preparers should know how to treat (or estimate in the case of used property) all direct and indirect costs associated with a property but should also be able to justify this treatment to all concerned parties, including the IRS in an audit. The preparer should have extensive access to all property-related documentation. Prepare all documentation for immediate reference before the preparer begins.

Helpful Documentation:

• Official payment documentation such as Project Budgets and Contractor’s Applications for Payment with the underlying invoices from subcontractors for new construction projects
• Construction drawings and documentation such as ALTA surveys and municipal permits for new construction projects
• Closing statements, appraisals, existing drawings, ALTA surveys, and rent rolls are invaluable for acquisition projects

Sometimes, especially in the case of an acquisition, documents are missing or unavailable. In such cases, the taxpayer should do their best to furnish whatever documentation is available and answer all of the preparer’s questions as accurately as possible.

Comprehensive documentation helps the preparer in identifying/classifying assets and allocating costs accurately.

4.  Site Visit

The preparer should visit the property to truly understand and document the project design as well as to understand the purpose and uses of specific assets. A detailed study of specific asset uses will help determine if any particular asset should be classified as personal property, qualified improvement property, or if it should remain long life property. For instance, if a portion of the building’s electrical conduit and wiring is specifically run to power qualified equipment, for example office cubicles, then that portion of the electrical conduit and wiring can be classified as personal property. The preparer should then document the equipment, the cubicles in this case, and the electrical connections with notes and photos as evidence for why the conduit and wire associated with these electrical connections is considered personal property. The preparer will also review the structure’s conformity with construction drawings and other documents, as well as conduct interviews with ownership, contractors, or other vendors who may be on site.

In the case of acquired properties, the preparer should collect photographic evidence of all substantial property as well as any physical deterioration or functional obsolescence of assets and account for the same while estimating the value of these assets.

5.  Report Preparation

After the site visit, the Cost Segregation team will begin the process of preparing the Cost Segregation report. They will review all the documents extensively, verify the assets, compare them or estimate their value with quality cost data (e.g. RSMeans), and segregate assets according to their appropriate recovery periods.

The report should then be reviewed to ensure that it aligns well with the formulae laid out in the IRS Cost Segregation Audit Technique Guide [1]. Once the report has been reviewed and finalized, the CPA will extract the pertinent data and apply it to the client tax return. Depending on when the property was placed in service, there may be other considerations for the accounting professional, e.g. filing a change in accounting method (form 3115) for properties placed in service in prior years, step-up in basis due to inheritance or partial ownership changes, or 1031 exchanges, etc.

Cost Segregation Study – Best Practices

A successful Cost Segregation study should maximize tax savings and cash flow but also conform to best practices so that the benefit gained will be strongly protected in the case of an audit. The preparer should ensure that the cost segregation report is comprehensive and accurate and that it conforms to the highest standards set out in the IRS ATG.

A successful Cost Segregation study should maximize tax savings and cash flow but also conform to best practices so that the benefit gained will be strongly protected in the case of an audit. The preparer should ensure that the cost segregation report is comprehensive and accurate and that it conforms to the highest standards set out in the IRS ATG.

1. The IRS describes a quality Cost Segregation study [2] as having the following elements:
2. Description of the study methodology and listing of the steps taken to classify assets and determine costs.
3. Use of common nomenclature to describe individual property items and standard numbering system to facilitate property classification.
4. A legal analysis, including relevant citations, to support Section 1245 property classifications.
5. Documentation of unit costs determination methodology (Engineering “take-offs”)
6. Asset grouping and identification and listing of assets reclassified as Section 1245 property
7. Explanation of the Indirect Cost treatment, and reconciliation of total allocated costs to total actual costs, and
8. Consideration of related issues such as Section 263A [3], changes in accounting methods, and sampling techniques.

[1] https://www.irs.gov/businesses/cost-segregation-audit-techniques-guide-chapter-1-introduction

[2] https://www.irs.gov/businesses/cost-segregation-audit-technique-guide-chapter-4-principal-elements-of-a-quality-cost-segregation-study-and-report

[3] https://www.irs.gov/pub/irs-drop/rr-05-53.pdf

Adding to the bottom line is the ultimate goal of every business. There are, of course, a multitude of methods a business can employ to achieve this goal. If you hold commercial real estate, a Cost Segregation Study might just be the method for you!

What exactly is a Cost Segregation Study?

Simply put, a Cost Segregation Study enables you to reallocate part of the cost basis of a purchased or newly constructed commercial property into multiple asset classes, allowing for accelerated depreciation of a percentage of the property’s cost basis. This depreciation results in a deduction under the tax code, lowering your tax bill and boosting cash flows. The IRS suggests the following asset categories into which the asset cost basis can be allocated:

• Personal Property
• Land Improvements
• Building
• Land

How does Cost Segregation help?

“A bird in hand is worth two in the bush”

Front-loading your depreciation benefit will let you take advantage of the time value of money. By identifying personal property and land improvement components that would have otherwise have been lumped in with the total cost of the asset, a Cost Segregation study helps businesses depreciate their assets at an accelerated rate and, in some cases, even expense the accelerated property immediately. 

Personal property such as furniture, fixtures, equipment, some flooring types, etc., have relatively short depreciable lives (five years). On the other hand, the normal depreciable life of buildings and other real estate assets is 27.5 years (for residential real estate) and 39 years (for commercial non-residential real estate). By treating components as personal property and land improvements, your commercial property assets will be eligible for much shorter life spans. The shorter the depreciable life of the asset, the greater your depreciation deductions and greater tax savings.

Cost Segregation also allows you to take advantage of bonus depreciation for qualified assets in the first year in which the asset is put in service. The 2018 Tax Cuts and Jobs Act (TCJA), for instance, has increased the bonus depreciation available for 5, 7, and 15-year assets to 100% of the depreciable basis. By segregating your cost basis, you can take advantage of the bonus depreciation deduction available for personal property and qualified improvement property.

Furthermore, the TCJA has also introduced the “new to the taxpayer” concept wherein a taxpayer can claim bonus depreciation for even previously used properties so long as the owner has not had a previous depreciable interest in the property. In other words, if you purchase commercial real estate property from a third party, you can claim bonus depreciation in the first year in which you place the asset in use for your business. Your real estate asset need not be a new asset for you to claim bonus depreciation.

Let’s illustrate the benefits of a Cost Aggregation Study through an example

Tim is the owner of a multi-unit apartment complex, which he purchased in 2020 for $1.5 Million. He wants to record the depreciation costs for the 2020 tax year for his property. Other details are as below:

• Land Value included in the Purchase Price of the Building = $500,000.00
• Depreciable life of the Asset (apart from the land and per tax laws) = 27.5 Years
• Marginal Tax Rate = 40%
• Applicable Bonus Depreciation for the year 2020 = 100%
• Depreciation Method followed for Long Life Property = Straight Line Method

Tim’s CPA calculates the depreciation for his property as follows:

Tim wonders if there is a better way to increase his tax savings due to depreciation and, in turn, increase free cash flow. His CPA suggests that Tim should explore the option of undertaking a Cost Segregation Study to save on his tax bills and increase cash flow. He also informs Tim that by segregating his acquisition cost, he can qualify for Bonus Depreciation on personal property and qualifying land improvements. Tim’s interest is piqued, and he hires a team of experts to conduct the study.

The team conducts the Cost Segregation Study and segregates the asset cost of $ 1.5 Million into the following asset categories:

Through the segregation of assets, the team found an increased depreciation deduction/tax savings of $302,909 and increased cash flow of $121,164 in the first year.

That’s an additional cash flow increase of $113,891 in the first year with a Cost Segregation!

Cost-Benefit Analysis

Many small businesses shy away from conducting Cost Segregation studies as they believe it to be cost-prohibitive. The simple truth is Cost Segregation Studies come at a cost but can be economical even for properties with a basis of as small as $300,000! You can even write off the cost of the study itself, that’s a win-win!

Another common reason for hesitation is the fear of depreciation recapture on the sale of assets. Though you may end up showing the recapture as ordinary income when you sell your asset at a profit, remember that this will be taxed at the capital gains rate. In contrast, if you had not used a Cost Seg study to offset your ordinary income in the present, that income would have been taxed at your marginal tax rate (which is certainly higher than the Capital Gains rate).

Do you struggle with multiple software applications, a pile of client documents, and a jumble of takeoff notes to put your cost segregation reports together?

Performing a cost segregation study is inherently complex and convoluted: every job has it’s own eccentricities which must be considered to make sure that a client’s cash-flow strategy is built on a solid foundation.

So how do you go about standardizing your cost segregation workflow to reduce redundancy, enhance precision, increase efficiency, and create high quality reports consistently and at a speed that not only sustains but grows your business?

Let’s start by establishing what makes a report high quality? According to the Audit Techniques Guide we have:

• Engineering-based, Detailed Takeoff
• Suggested Data Sources
• Clear and Transparent Labeling/Numbering System for Takeoff
• Clear Reasoning for Segregation of Personal/Real Property into Respective Depreciable Asset Classifications

How do you include these elements into your reports, consistently and efficiently?

Let’s take each element separately,

Engineering-based, Detailed Takeoff:

Properly document the property on-site, draw information from client interviews, property photos, and relevant data sources on the internet like GIS Maps and Google Earth.

Suggested Data Sources:

The IRS Audit Techniques Guide explicitly mentions two cost sources, RS Means and Marshall & Swift. Of the two, RS Means is by far the most complete.

Clear and Transparent Labeling/Numbering System for Takeoff:

Labeling and numbering of takeoffs to help illuminate your choice of asset classification within the report.

Clear Reasoning for Segregation of Personal/Real Property into the Respective Depreciable Asset Classifications:

The special sauce of any cost segregation report, what gets qualified, what doesn’t, why, and what is the recommended depreciable life of each asset according to the relevant depreciation method?

Now that we’ve outlined the significance of each element, let’s take a look at what kind of system can efficiently and precisely receive the detail of the engineering-based takeoff method, is set up to use the IRS Audit Techniques Guide recommended data sources, includes a transparent labeling/numbering system, and implements clear reasoning for asset segregation/qualification.

How can you increase precision, efficiency, quality, and speed simultaneously? In a nutshell, custom software.

Every Cost Seg provider is currently using some type(s) of software to complete their projects but in order to include all of the benefits discussed above, the software solution needs to address the needs of the cost segregation professional directly.

Custom-designed software for the Cost Segregation professional has traditionally been hard to come by, until now.

The SegStream Cost Seg workflow was built to complement the knowledge of accounting and specialty tax professionals, eliminating trade-offs between quality and consistency, and precision and velocity.

SegStream brings the Cost Seg workflow into a single piece of software, where everything from takeoff to data entry to report generation can be optimized, continuously and rapidly.

The entire business world is being eaten by software and Cost Segregation will not be spared. This is a new world, in which custom software is the driving force of quality and business innovation in every industry, and your business can’t afford to get left behind.

SegStream is the first software developed by Cost Segregation engineers for accounting and specialty tax professionals. Read further if you’d like to know more or Contact Us for a demonstration of how SegStream can increase everything from your employee morale to your profit margin.