Cost Segregation Services

Cost Segregation is a tax strategy that permits the allocation of building costs between real estate and personal property based on case law and IRS guidelines utilizing qualified engineers, estimators or architects to determine the proper cost segregation. The benefit of this tax strategy is an acceleration of the tax deductions resulting in additional cash for the company from a reduction in taxes and a recovery of prior taxes.

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About Cost Segregation?

Cost Segregation is an often overlooked, under-utilized, and misunderstood tax strategy for building depreciation.

  • It is not a tax gimmick or tax shelter.
  • It does not play fast and loose with the Internal Revenue Code.
  • It is not something that needs to be hidden or buried in work papers.
  • The concept has been accepted by the Internal Revenue Service who uses cost segregation examples in published regulations and internal memoranda.
  • If properly structured, cost segregation is an effective means of significantly accelerating depreciation deductions in the early years of a building’s tax life thereby increasing cash flow.
  • Cost Segregation can be applied to a new building or to an existing building.
  • A cost segregation study can be applied to a building that has been previously acquired within the past 10 years, and once completed, its benefits can be utilized immediately. Thus, if a taxpayer acquired a building in 1998 and did not apply a cost segregation study, the taxpayer can have the study done in 2004 and take the entire missed depreciation in 2004. The IRS considers this a change in accounting method and gives automatic consent to the change when the form 3115 is filed.
  • Generally, any building, not including land, with a cost of $750,000 or more is a potential candidate for a cost segregation study.

What is Cost Segregation?

The genesis of Cost Segregation is from a type of depreciation referred to as Component Depreciation. Cost Segregation is the application of engineering/ architectural studies to buildings to separate from the buildings those parts of a building that can be classified as personal property. If a portion of a building can be classified as personal property, the depreciation of such property follows the rules for personal property and not the rules for real property. Currently, commercial real property is depreciable over 39 years while personal property is generally depreciable over 3-7 years. The impetus for Cost Segregation comes from a United States Tax Court decision, Hospital Corporation of America v. Commissioner, 109 T.C. 21 (1997). In that case, Hospital Corporation of America (“HCA”) owned several buildings that were subject to long depreciation periods. HCA separated through engineering studies the structural portion of the buildings from the non-structural portion, and depreciated the latter over 5 years.

Although the Tax Court found the property subject to longer depreciation periods, the Tax Court held that HCA had not proven that the property was personal property. However, the Court did not state that it could not be proven. In making its determination, the Tax Court found the following criteria to be important:

  • Is the property capable of being moved;
  • Is the property intended to remain permanently in place;
  • Is the property capable of being replaced;
  • How extensive a job is the removal of the property;
  • How much damage is sustained upon removal;
  • How is the property fixed; Can the property be used in another location.

How Can Cost Segregation Benefit Your Company?

  • Cash flow generated now.
  • Taxes are reduced by accelerating depreciation deductions.
  • Taxes are then repaid gradually through decreased depreciation deductions in the later years.
  • Savings are measured by the Net Present Value of the increased net cash flow.

For more details on Value Defined, LLC's Cost Segregation Services, please email us at or contact us at 419-931-3005.