When Should a Cost Segregation Study be Performed?

Brian Coddington

Director of Tax Accounting Methods

There are several situations where a cost segregation study should be performed. A cost segregation study should be performed immediately after construction or acquisition or following major capital improvements (including leasehold improvements). The study can also be performed after a change in ownership, including inherited property and change in partnership interest. And finally, a cost segregation study can be useful for buildings already in service. In this situation, a Look-back study would be performed.

The IRS permits taxpayers to use a cost segregation study to adjust depreciation on properties placed in service as far back as January 1, 1987. Many property owners and tax advisors share a common misconception that once the three-year statute to amend has expired, the taxpayer can no longer make a change. Fortunately, this is not the case. Upon completion of the study, the taxpayer is allowed to make an adjustment under IRC §481(a) to catch up on depreciation. The catch up, which is taken in a single year, is equal to the difference between what was depreciated and what could have been depreciated if a cost segregation study was performed on day one.

Expectedly, these benefits can be quite substantial. As an added bonus, the change can be made without filing an amended return. The taxpayer simply files Form 3115 (Change in Accounting Method) with the cost segregation study attached.

The Consequences of a Poor Cost Segregation Study

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Per the IRS Audit Techniques Guide, studies being performed by unqualified individuals and those using an abbreviated methodology will receive higher scrutiny than the ones performed by qualified professionals who utilized the detailed engineering-based approach. Therefore, it is more important than ever to have your studies performed by an expert in the field.

The Source Advisors Approach

Our approach to cost segregation follows these values. At Source Advisors, we don’t train our team on your dime. We only hire heavily experienced cost segregation specialists. We believe experience is critical to maximizing the benefits of cost segregation, and most of our team has spent between 10 and 20+ years managing cost segregation projects. Even our least experienced member has conducted more studies than many who manage projects at large firms.

We have a specialized in-house dedicated cost segregation team. Our team is composed of architects, professional engineers, CPAs, MBAs, and LEED cost segregation specialists dedicated solely to cost segregation. Our management team is involved in every project we’re engaged to perform and often conduct the site visits themselves. And, with rare exceptions, we always conduct a site visit. The IRS expects it, and we believe it is the best way to accurately assess a property.

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