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Enhanced Value from Cost Segregation Studies


With the finalization of the tangible property regulations (the “repair regulations”) and mandatory implementation for tax years beginning in 2014, the current and long-term benefits of a cost segregation study have dramatically increased.
A cost segregation study is the process of identifying and allocating costs in a building to different components.  Anyone who has purchased, constructed, or remodeled a building in the last 15 years may benefit from a cost segregation study.  In addition to the increased cash-flow from accelerated depreciation deductions typically associated with a cost segregation study, several new cost-saving opportunities may be realized from cost segregation.

One significant change under the new repair regulations allows taxpayers to take a deduction for any undepreciated tax basis when they replace a building component (roof, HVAC, etc.).  When an existing building is purchased, there is no mandatory building component allocation.  A cost segregation study provides this allocation, and can be used as long as the taxpayer owns the building.

In conjunction with the component allocation, the new repair regulations provide a different definition for what constitutes a repair to a component versus a capitalized cost subject to depreciation.  The new regulations allow you to look back into prior tax years and apply the new repair definition to previous expenditures and catch up in the current year on missed deductions.

Also, most providers are now performing a Section 179D analysis concurrently with cost segregation studies.  Section 179D allows for a deduction of up to $1.80 per sq/ft for energy efficient buildings.

If you own or have purchased a building in the last 15 years and have not had a cost segregation study, there may be an opportunity to reduce taxes.  Please contact your Berntson Porter tax professional at (425) 454-7990 if you would like more information.