The Strategy That Can Save Real Estate Developers Thousands

In cost segregation analysis—a tax strategy that can save real estate developers and business owners thousands of dollars by reclassifying assets during new construction, building expansion or remodeling of commercial and residential properties. GlobeSt.com caught up with Louis Guay, director of R&D Tax and Cost Segregation Services at Kaufman Rossin, to learn more about this tool in part one of this exclusive interview.

GlobeSt.com: What is a cost segregation analysis?

Guay: A cost segregation analysis is an engineering-based study of all the costs associated with the construction or the purchase of a commercial real estate property or certain types of residential property. The objective of the analysis is to allocate the costs resulting from the construction of a new real estate property, or from the purchase of an existing one, to either real property or personal property. In general, a real estate property includes elements of personal property that can be depreciated more rapidly than the elements of the property that relate instead to the structure and various systems required to operate or maintain a building.

As a result, instead of depreciating the entire real estate property over 39 years—27.5 for residential rentals—with a straight-line method, personal property assets identified during the course of cost segregation analysis are assigned shorter cost-recovery periods of five or seven years and can be depreciated using accelerated methods. Costs inherent to certain land improvements can be assigned to a 15-year recovery period. Therefore, a cost segregation analysis leads to faster depreciation write-offs that can translate into significant tax benefits for a taxpayer who owns commercial real estate.

GlobeSt.com: How can real estate developers benefit most from a cost segregation analysis? What other businesses can benefit?

Guay: A cost segregation analysis will generate larger depreciation deductions in the years following the year that a new real estate property is placed into service. The increased deductions come from the accelerated depreciation of the elements of personal property identified in the cost segregation analysis and from bonus depreciation on certain eligible costs. The increased deductions are beneficial for real estate developers as they will translate into an increased cash flow that can be leveraged immediately for new projects.

Cost segregation can benefit any business or individual who own commercial real estate or certain types of residential real estate. A cost segregation analysis can be conducted on any type of commercial real estate property, including multifamily properties, retail and shopping plazas, offices, manufacturing plants, mixed-use, warehouses, restaurants, banks, dealerships, hotels and more.