Cost Segregation Studies

What are they?

     1.  New Construction

       •   Comprehensive analysis of hidden  
     personal or tangible property for
     commercial buildings

       •   Analyze cost data including contractors
     application of payments, change orders,
     owner incurred costs and indirect costs

       •   Analyze cost data including contractors
     application of payments, change orders,
     owner incurred costs and indirect costs

     2.  Purchased Real Estate

       •  Analyze purchase price of property to
     segregate other assets from the building
     cost

       •  Allows indirect costs to be allocated to
     various depreciable lives

     3.  Cost Segregation Study is not a
     Component Depreciation Study

What do they apply to?

     1.  New Buildings under construction

     2.  Existing buildings undergoing renovation or
     expansion

     3.  Office leasehold improvements

     4. Purchase of existing properties

     5.  All post 1986 real estate construction,
     building acquisitions or improvements.

History 

     1.   Component Depreciation Studies

      •  Component depreciation allowable till
      1981 Act

    •  ITC Allowable till 1986 Act

     2.   Hospital Corporation of America case

   •  Ruled ITC case law can be used in
      determining structural components for
      purposes of MACRS

   •  Permanent structural component versus
     personal property

     3.  IRS Legal Memorandum 199921045

   •  Must have Cost Segregation Studies

   •  Won’t allow fast depreciation under
      MACRS without a “logical and objective
      measure”

Major areas of cost allocation

     1.  Electrical
2.  Plumbing
3.  Site work
4.  HVAC
5.  Finished carpentry
6.  Indirect or soft costs

Benefits of Cost Segregation Studies

     1.  Increased depreciation in earlier years     2.  One time catch up spread out over 4 years
     (IRS Revenue Procedure 98-60)
3.  Results in less Federal and State Income
     Taxes
4.  Results in increased cash flow

Examples

     1. ABC Corporation purchases a building for
    $10,000,000.  Land value deemed to be
    $2,000,000.  Pursuant to a Cost
    Segregation Study, $750,000 was allocate
    to 15-year property, $50,000 to 7 year
    property and $600,000 to 5 year property. 
    The net result at 8% is a present value tax
    saving of $250,051.

     2. Same examples as above except pursuant
    to the Cost Segregation Study $0 was
    allocated to 15 year property, $50,000 to 7
    year property and $400,000 at 8% is a
    present value tax saving of $105,044.