What is cost segregation?

A cost segregation study is a detailed investigation of the costs and components of property for both new construction as well as acquired property.

The analysis includes the identification and quantification of various components of a building or leasehold improvements to segregate the items and their costs and/or values into various depreciation lives for tax purposes. We utilize information such as construction costs, appraisals, site inspections, blueprints, surveys, recognized cost manuals, and professional judgment and experience.

Every cost segregation project is unique so we tailor each engagement to the client’s property, business, industry, and overall tax position.

Our Cost Segregation Group completes studies on projects ranging in capitalized costs of under one million dollars to portfolios of properties in the hundreds of millions of dollars.

There are few black and white areas when doing a cost segregation study. Consequently we review and discuss with the client the many tax related gray areas and positions as well as the corresponding risks that may arise as part of the analysis.

What a Cost Segregation Study Is Not
A cost segregation analysis is not a tax shelter. It is not a commodity. Likewise, all cost segregation studies and providers are not the same and a client should be very skeptical of an unusually high benefit projection and/or unreasonably low fee for the analysis.

History of Cost Segregation
A cost segregation study is not a tax shelter and it is not new. It has evolved from similar processes used to complete investment tax credit studies in the 1970s and 1980s. In general, cost segregation studies came to life shortly after the 1986 tax reform act. The industry has expanded significantly in the past decade.

The positions taken in cost segregation studies are based on many years of court cases, revenue rulings, and revenue bulletins. In 2004, the IRS issued the Cost Segregation Audit Techniques Guide. This Guide provides a general framework for IRS agents reviewing cost segregation studies. This Guide is not an official pronouncement and in some circumstances contradicts various revenue rulings, court cases, and other IRS documents related to cost segregation tax law.

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