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Generate Current Tax Savings from Cost Segregation Studies

Commercial property (excluding the underlying land) and tenant improvements are generally depreciated on a straight-line basis over 39 years.   Cost segregation is a process through which the lump-sum cost of commercial real estate and tenant improvements are broken down and parceled out into their respective component parts.  The individual components have a shorter cost recovery period, meaning that you can claim larger depreciation deductions, thereby reducing current taxes and increasing cash flow.

Special bonus depreciation provisions in 2011 allow for 100% of qualified costs to be fully expensed in the current year instead of capitalized and depreciated over a number of years.  In 2012, bonus depreciation is limited to 50% of qualified costs, and it is scheduled to disappear in 2013.  In addition to bonus depreciation, there is a one-time, special provision under IRC Sec. 179 that allows eligible taxpayers to take an immediate deduction of up to $250,000 of qualified leasehold improvements placed in service in tax year 2011.

By coupling cost segregation with the bonus depreciation and Sec. 179 provisions, you may be able to take a current tax deduction for items that would normally be capitalized and depreciated over 39 years.  These additional deductions decrease current income taxes and real estate taxes, and provide for an immediate increase in cash flow.

If a building was purchased and you did not perform a cost segregation study in the year of purchase, there is still time for you to take advantage of accelerated depreciation.  IRS regulations allow you to perform a cost segregation study in the current year and catch up on the ‘missed’ depreciation.  This catch up method makes cost segregation viable for commercial properties purchased in the last ten years.


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