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Is Cost Segregation Legitimate?

Cost segregation defies the old saying, “if it’s too good to be true, it probably is.” Many real estate owners are skeptical regarding federal income tax savings from a relatively unknown concept termed cost segregation. One of their first thoughts is often, “if this were legitimate, wouldn’t my CPA/tax preparer have suggested it?”

The federal income tax code is thousands of pages ling with arcane tax benefits for various industries. Cost segregation has slowly evolved since it become available in 1996. It was initially used primarily by “big five” accounting firms as a specialty practice for real estate with a cost basis of at least $10 or $20 million.

The adoption rate for cost segregation is still well under 5% even though it has been available for more than 10 years. Reasons for the slow adoption rate include limited information being provided to owners and tax preparers, the dual decision making process for owners/tax preparers to evaluate the concepts, fees for the service, and uncertainty regarding the relative risks.

The IRS has substantially mitigated the risks of using cost segregation by publishing the Audit Technique Guide (ATG). There should be minimal risk in an audit for a cost segregation report that conforms with the Audit Technique Guide. While it is impossible to eliminate risk, a depreciation schedule prepared by a trained appraiser who complies with the ATG should be less likely to be challenged than the typical depreciation. (The typical depreciation schedule is compiled using guesstimates of land value. The balance of the cost basis is assigned to improvements.)

The Audit Technique Guide is more than 100 pages long and has details regarding in excess of 100 items which can be segregated. Trained, experienced appraisers are capable of preparing a credible report that effectively documents this basis for the depreciation schedule. This type of report is the most credible and reliable method of documenting the depreciation schedule. A report from an untrained or unscrupulous appraiser is not reliable. A real estate owner who properly reviews the credibility and qualification for his cost segregation appraisal can expect a credible report and tax benefits.

Cost segregation produces tax deductions and reduces federal income taxes across the country and in every size market. Below are just a few examples of where cost segregation generates meaningful tax deductions.

City:

  • Orlando, FL
  • Tampa, FL
  • Baltimore, MD
  • New Orleans, LA
  • Memphis, TN
  • Denver, CO
  • Boston, MA
  • Philadelphia, PA
  • New York, NY
  • Las Vegas, NV
  • Charlotte, NC
  • Omaha, NE
  • Oxnard, CA
  • McAllen, TX
  • Portland, OR
  • Virginia Beach, VA
  • Portland, OR
  • Durham, NC
  • New Haven, CT
  • Indianapolis, IN
  • Poughkeepsie, NY
  • Little Rock, AR
  • Toledo, OH
  • Santa Rosa, CA
  • Worcester, MA
  • Austin, TX
  • Stockton, CA
  • Nashville, TN
  • Albany, NY
  • Milwaukee, WI

Cost segregation produces tax deductions for virtually all property types.

Property Type:

  • Service station
  • Skating rink
  • Retirement home
  • Shopping mall
  • Apartments
  • Cold storage facility
  • Department store
  • Drugstore
  • Health spa
  • Restaurant

Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.

Industry:

  • Transportation equipment manufacturing
  • Food manufacturing
  • Air transportation
  • Furniture manufacturing
  • Golf courses and country clubs
  • Arts, Entertainment, and Recreation
  • Apparel manufacturing
  • Warehousing and storage
  • Paper manufacturing
  • Publishers

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