Cost segregation is a tax strategy that involves identifying assets associated with commercial real estate that can be accelerated for depreciation purposes. An engineering report is used to classify assets into four categories - personal property, land improvements, building, and land. Personal property and land improvements can be depreciated over shorter time periods than buildings, providing tax savings. While cost segregation provides tax benefits, it requires an expensive engineering study and aggressive strategies may risk penalties if audited.

1. General Accounting Cost Segregation

2. What is Cost
Segregation?
2
• Strategic tool in saving taxes
• Cost effective tax strategy utilized in
acquiring commercial real estate
• Allows you to identify and reclassify
personal property from real property
• Starts at the acquisition of the real
estate

3. Cost
Segregation
Strategy
3
• An engineering report must be used in
grouping assets in four categories:
• Personal Property
• Land Improvements
• Building
• Land

4. Cost
Segregation
Strategy
4
• Personal Property
• Depreciated under a recovery period
spanning from five to seven years and
through the double-declining method
• Examples are fixtures, furniture and
window treatments

5. Cost
Segregation
Strategy
5
• Land Improvements
• Have 15 years of usable life
• Subjected to an expedited depreciation
method called 150% declining balance
method
• Examples are fences and sidewalks

6. Cost
Segregation
Strategy
6
• Building
• Its value must be maximized for any
residual value to be apportioned to
non-depreciable land
• Its parts can be valued and depreciated
separately

7. Cost
Segregation
Strategy
7
• Land
• The amount that was not accounted for
in the other three categories
• Appraisal may yield a value that is
somewhat low or insignificant

8. Cost
Segregation
Study
8
• Engineering-based analysis utilized to
expedite depreciation deductions
• Its main objective is to determine all
construction-related costs that can be
depreciated over a certain period
• Performed shortly after the construction
or purchase of a building
• Included in the buildings that qualify for
a CSS are hotels and resorts, office
buildings, restaurants and retail centers

9. Cost
Segregation
Study
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• Facilitated by:
• Engineers, construction firms and tax experts
• Those who are knowledgeable of the
changing tax laws
• Those who have knowledge of previous court
cases and rulings related to individual assets
• Those who have complied with the IRS Audit
Technique Guides
• Those who can identify new areas in saving
taxes

10. Benefits and
Drawbacks
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• Increase the cash flow
• Reduce income taxes and real property
taxes
• Give an independent third-party
analysis that will stand up against an
IRS audit
• Quite expensive
• When used aggressively, penalties may
be imposed upon the taxpayer

11. Good fortune is what
happens when
opportunity meets with
planning.
- Thomas Alva Edison
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BKM Sowan Horan, LLP
15301 Dallas Parkway, Suite 960
Dallas, Texas 75001
Phone: 214-545-3965
Fax: 214-545-3966
www.bkmsh.com
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