Real Estate Investors Limit Risk with Cost Segregation
Real estate investors are initially shocked when they learn they can cut their tax rate by over half and defer paying the income taxes as a result of cost segregation. After the shock wears off, real estate investors sometimes ask if cost segregation is a risky tax shelter.
Many high net worth real estate investors have had bad experiences with tax shelters. While a high level of skepticism is appropriate when considering issues related to federal income taxes, a detailed review of the income tax code and IRS documentation will show cost segregation to be both legitimate and effective.
Many real estate investors are familiar with component depreciation. Component depreciation was used until the early 1980’s to sharply increase the level of real estate depreciation. There were some concerns of abuse by the IRS. In the early 1980’s, the option of using component depreciation was eliminated but much more generous depreciation schedules were substituted. These generous real estate depreciation schedules were eliminated in 1986.
There was no safe harbor for increasing depreciation beyond what was allowed in the tax tables from 1981 through 1996. The HCA (Hospital Corporation of America) case was determined in favor of HCA in 1996. When the IRS decided not to appeal the case, a new option to increase real estate depreciation became available; it is termed cost segregation.
While the methodology of cost segregation is different from that for component depreciation, the end result is similar – a higher level of depreciation for real estate investors.
The IRS codified rules for cost segregation in its Audit Techniques Guide (ATG), apparently to provide both its officers and practitioners with clear guidelines.
A properly prepared cost segregation study prepared by a trained and experienced appraiser has a low level of risk. The Audit Techniques Guide provides guidance for material issues encountered on a routine basis. There is risk associated with using a report prepared by an individual who is either not well trained or who ignores the rules and segregates inappropriate items. There is some risk any depreciation schedule will be challenged in an audit. A high quality cost segregation report is the best documentation to support a real estate depreciation schedule.
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Cost segregation produces tax deductions and reduces federal income taxes for real estate owners across the country and in every size market. Below are just a few examples of where cost segregation generates meaningful tax deductions.
City:
- Houston, TX
- Tampa, FL
- Los Angeles, CA
- Memphis, TN
- Bridgeport, CT
- Washington, DC
- San Francisco, CA
- Orlando, FL
- New York, NY
- Philadelphia, PA
- Boise, ID
- Chicago, IL
- Buffalo, NY
- Stockton, CA
- Palm Bay, FL
- Chattanooga, TN
- St. Louis, MO
- Birmingham, AL
- Charleston, SC
- Greensboro, NC
- Bakersfield, CA
- San Diego, CA
- Santa Rosa, CA
- Baton Rouge, LA
- Lancaster, PA
- Nashville, TN
- Sarasota, FL
- Akron, OH
- Riverside, CA
- Jackson, MS
Cost segregation produces tax deductions for virtually all property types.
Property Type:
- Research and development
- Manufacturing/processing
- Strip shopping center
- Discount store
- Bar
- Restaurant
- Motel
- Neighborhood shopping center
- Veterinary clinic
- Apartments
Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.
Industry:
- Computer and electronic manufacturing
- Warehousing and storage
- Health care facilities
- Amusement parks
- Transportation equipment manufacturing
- Air transportation
- Beverage and tobacco product manufacturing
- Food manufacturing
- Day care facilities
- Printing activities
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