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‘Cost segregation’ little-known tool for property owners

PROCESS CAN SPEED DEPRECIATION IF BUILDING IS GOOD FIT

NORTH BAY – When it comes to depreciation of real estate, some property owners are taking advantage of a system that reclassifies portions of a property to allow quicker deductions.

This process is known as cost segregation. Currently, the straight line method depreciates the entire property at the same rate for either 27.5 or 39 years, depending on whether the building is apartment housing or industrial, respectively.

With cost segregation, an analysis of the individual parts of the building is completed and each piece is set at a different rate of depreciation.

According to Larry Cunha, a CPA at Eckhoff Accountancy in San Rafael, many property owners and even their accountants are not aware of the possible benefits of cost segregation.

It is at the intermediate level of accounting school that depreciation is taught, usually in the junior year, and there is not a lot of time spent on it.

Therefore, said Mr. Cunha, “It is not taught because it is too specific, it is all case law.” Yet people have been doing it for years, and it doesn’t look like it is going away soon.

To begin the process of cost segregation, a study of the property is performed to find out whether it will be financially beneficial.

Angie Grainger, CPA/PFS, is the vice president of financial planning at Exchange Bank. She said that the kind of businesses that take advantage of cost segregation most often are manufacturing plants and grocery stores.

Her article “Money Found,” published in 2006, details just how cost segregation can and can’t help out taxpayers.

Ms. Grainger said that although cost segregation is certainly a useful way to claim depreciation, there is a cost recovery to consider.

Also, she said, “if you don’t have at least a million dollars in costs, it is probably not worth it.” She is very clear that cost segregation is a deferral tactic, not a tax reduction strategy.

But the benefits can be staggering and the costs reasonable if you are the right candidate for the process.

In 2004, the IRS issued an audit techniques guide for cost segregation that was updated in 2007 and is available online at the IRS Web site.

It lays out six different methodologies to work with.

The most desirable approach is the detailed engineering approach from actual cost records, where each invoice having anything to do with the property is looked at, all as-built drawings are examined and every other detail is looked at on paper. For older buildings that have hard-to-find records, there are ways to estimate costs.

Mr. Cunha said that a common misconception about cost segregation is that it will interfere with the later sale of the property. The rules only apply to property depreciation, not a sale.