Cost Segregation FAQ

Below are answers to the most commonly asked questions we receive regarding our Cost Segregation Services. If you have additional questions or would like to speak to one of our professionals about your property, contact the POER office nearest to you. Or go to our contact us page and send us an email with your information and we will contact you.

What is Cost Segregation?
Why have I not heard about Cost Segregation before?
How do I know if I will benefit from a cost segregation study?
How does Cost Segregation work?
Is cost segregation an acceptable practice; is it actually legal?
When is a study performed?
What sort of benefit might I expect?
Does this increase my chances of being audited?
What if I am audited?
What sort of documentation will be needed to perform the study?
Can you still perform a cost segregation study if I do not have all of the original construction documents?
How long does it take to perform a cost segregation study?
My project is still under construction. Do I have to wait until construction is complete?
I already have an architect on the job; can he perform the study for me?
Why can’t my CPA do the study?
If my building was constructed or acquired in a prior year, will I need to file an amended return?
My property is involved in a 1031 exchange. Should I still consider cost segregation?
Won’t I get the deduction eventually without a cost segregation study?
Do you charge for estimates? I am interested in learning more.
What do I need to provide POER for an estimate?

What is Cost Segregation?
A cost segregation study is a federal income tax tool that increases your near term cash flow, in the form of a deferral, by utilizing shorter recovery periods to accelerate the return on capital from your investment in property. Whether newly constructed, purchased or renovated, the components of your building may be properly classified, through a cost segregation study, into shorter recovery periods for computing depreciation deductions. The study properly carves out, into five, seven and fifteen years lives, certain qualifying portions of your building that are normally buried in a thirty-nine year or twenty-seven and a half year category.

Why have I not heard about Cost Segregation before?
Although cost segregation has been around since 1987, it was primarily the purview of the major accounting firms, who reviewed only very large projects for substantial fees. There were very few experienced professionals who combined both the construction and accounting expertise that is necessary to perform the study correctly. Since 1997, and the seminal court case Hospital Corp. of America & Subs. v. Commissioner, the service has become both wider spread and more cost effective. Marvin Poer and Company is proud to bring this quality service to you at a very affordable price.

How do I know if I will benefit from a cost segregation study?
Please feel free to contact one of POER cost segregation consultants to discuss the particulars of your building however, as a rule, the following is generally true. If you own commercial real estate in excess of $1,000,000; that was newly constructed, purchased or remodeled in the last five years; that you intend on holding for the next several years; and are a tax paying entity and in a tax bracket for which a tax deferral is beneficial; you may benefit from a cost segregation study.

Some of the industries that typically benefit from a study are: apartments, auto dealerships, banks, casinos, distribution centers and warehouses, grocery stores, health care facilities, hotels, manufacturing facilities, nursing homes, office buildings, shopping centers, sports facilities and restaurants. Typically, the more complex buildings will generate the greatest benefit from a cost segregation study.

How does Cost Segregation work?
POER will gather and analyze information, provided by you, such as; construction drawings, invoices, change orders, depreciation schedules, etc… From the invoices we will identify any property that may be specifically reclassified. In the likely event that the invoice detail is insufficient for the entire study, we will augment the invoices with detailed estimates derived from the construction drawings and site visit of the property. The results will be presented in a report that includes our methodology, relevant case law, definitions, property description, photos, and detailed schedules of our calculations.

Is cost segregation an acceptable practice; is it actually legal?
Of course, there is a very long history of legislation and court decisions supporting our methodologies. In fact, post September 11 legislation even promoted cost segregation studies by providing an incentive in the form of bonus depreciation for certain qualifying property. As recently as 2004, the IRS issued an Audit Techniques Guide that defines quality studies.

When is a study performed?
Ideally, a cost segregation study should be performed in the same year that a building is either constructed, purchased or renovated. This provides for the greatest benefit and the most accurate collection of the relevant data. Circumstances, however, often prevent this form happening.

Look-back studies are cost segregation studies performed on property placed into service in a previous year. In many cases, due to expense, lack of knowledge, etc…, the property owner did not have a study performed at the time of purchase or construction and therefore missed out on the available depreciation expense deductions. In theory, properties may be examined that were capitalized as far back as 1987 however, they are already largely depreciated and after five years, it becomes increasingly difficult to ascertain the original condition of the property. Properties capitalized within the last five years generally make good targets.

The IRS now allows for an immediate catch up in missed depreciation deductions for property reclassified in a cost segregation study. The adjustment to income is made pursuant to IRC § 481(a) and is a reversal of the previous policy that would spread the catch up over a four year period. This 481(a) catch up in depreciation may amount to a significant windfall of increased cash flow in the year of the catch up.

What sort of benefit might I expect?
Each building is necessarily different though the benefits of a study are largely dictated by the type of property and, since this is a tax deferral strategy, the length of time that you hold onto the property. If you hold onto your property for a full 39 years, the benefit is approximately $.19 for every dollar reclassified from thirty-nine years to five years. Using the half-year convention, this assumes a 35% Federal tax rate and an 8% discount rate.

For every $1,000,000 of property reclassified from 39 years the cumulative present value of tax deferral equals approximately:

$195,000 for 5-Year Property
$178,000 for 7-Year Property
$108,000 for 15-Year Property

Please feel free to contact a POER consultant for a free estimate based on the specifics of your particular building.

Does this increase my chances of being audited?
No. Although the IRS is better equipped to audit a study than in the past, the study itself does not trigger an audit. Of course, if you are already undergoing an audit the cost segregation study may very well be a part of it. POER cost segregation studies are designed to stand up in an audit and we will provide audit support in the unlikely event that an audit occurs.

What if I am audited?
POER's Cost Segregation services include fully documented audit support backed by detailed work papers. Invoices, takeoffs, photographs, e-mails, Excel models, Access databases, draft reports and final reports are electronically archived for future reference. When estimates are performed from construction drawings, the drawings are generally highlighted to indicate items that have been reclassified. Drawings are always returned to the client for safekeeping and future reference.

What sort of documentation will be needed to perform the study?
To determine the feasibility of a study, POER only has to know certain basic information, such as the capitalized cost, property location, placed-in-service date, etc. to provide an estimated benefit.

Once POER is engaged, we will determine the specific information require based on your particular project. While all projects differ somewhat, the following list is representative of most projects:

New Construction:

The date placed into service
The capitalized costs
Depreciation schedule (If placed into service in a prior year)
Construction drawings such as; architectural, civil, electrical, landscaping, mechanical and plumbing drawings.
Contractor’s final application for payment (Usually AIA G702 & G703) or similar document
Change orders with a brief description of each
Invoices specific to the major trades or expenditures
Specifications (If available)
Rent roll (For multi-tenant buildings)
Any owner incurred costs outside the General Contractors scope of work. For example; architectural and engineering fees, permits, etc…
Site visit

Purchased Properties:

The date placed into service
The capitalized costs
Depreciation schedule (If placed into service in a prior year)
Any existing construction plans, site plans or surveys
Square footages of the building and site
Appraisal (If available)
Rent roll and/or stacking plan (For multi-tenant buildings)
Site visit

Can you still perform a cost segregation study if I do not have all of the original construction documents?
Absolutely. The manner in which we conduct the study will be somewhat different as we will have to perform an extensive site visit to thoroughly document the building and fill in any of the gaps in the original documentation. Our qualified staff of construction industry experts is well suited to perform this type of study.

How long does it take to perform a cost segregation study?
Because each project is different, the timing may vary as well. Once all information is received from you, POER typically issues the final deliverable in three to six weeks. Once we receive an engagement letter, a specific schedule is assigned to each project based upon your needs, time of year and filing deadlines. Because our workload may increase dramatically just prior to a filing deadline, we recommend not waiting until the last minute.

My project is still under construction. Do I have to wait until construction is complete?
This is really a best case scenario. POER consultants will work closely with your construction personnel to improve data acquisition as well as audit protection.

I already have an architect on the job; can he perform the study for me?
Unfortunately, unless they have a great deal of experience in this highly specialized field, this is usually not a great idea. While your architect may be an expert in state and local building codes, it is unlikely that they will have the years of experience in federal tax codes, court cases and methodologies which are necessary for a quality study.

Our dedicated construction industry and federal tax professionals are experts in this field. Not only do they have the construction background of your architect, they also have a thorough understanding of the tax law, court cases and accounting procedures necessary for the study. You may be assured that POER’s work is fully compliant with the latest recommendations and expectations of the IRS as well as the latest changes in tax law and court cases.

Finally, POER’s team provides audit support in the unlikely event that the cost segregation study is reviewed by the IRS.

Why can’t my CPA do the study?
They can, but typically at only a very high level. CPA’s will often perform an invoice approach cost segregation study that attempts to identify the more conspicuous qualifying property from the contractor’s invoices. Unfortunately, the invoice approach leaves a great deal on the table and is dependent on the quality of the contractor’s descriptions and on the complexity of the building. POER has a highly experienced staff of construction industry and valuation experts who specialize in reviewing all of the construction documents to extract every dollar of the deferral that you are legally entitled to. In fact, CPA firms often prefer to team up with POER to augment their own expertise.

If my building was constructed or acquired in a prior year, will I need to file an amended return?
No need to worry, instead of filing an amended return, Revenue Procedure 2005-17 allows taxpayers to file a form 3115 Automatic Change in Accounting. This form can be used to fix depreciation as far back as 1987. In fact you are actually allowed to catch up on missed depreciation with a 481a adjustment in the current year. Marvin Poer and Company can prepare the 3115 for you, if you wish.

My property is involved in a 1031 exchange. Should I still consider cost segregation?
Certainly, cost segregation studies are frequently performed in conjunction with 1031 exchanges. Please feel free to speak with one of our consultants to discuss the specifics of your project.

Won’t I get the deduction eventually without a cost segregation study?
The simple answer is yes. However, the cost segregation study effectively gives you an interest free loan for the first 15 years that you own the property, which is then repaid interest free over the remaining life of the property. Additionally, because of the time value of money, the same money is worth far more now than decades in the future.

Do you charge for estimates? I am interested in learning more.
POER never charges for cost segregation estimates. Please feel free to call or e-mail us for a complimentary estimate or simply to learn more about Marvin Poer and Company cost segregation and other services.

What do I need to provide Marvin F. Poer and Company for an estimate?
The more information you can provide the better. At minimum however, we need the capitalized cost for your project, the years or years that it was capitalized in, a brief description of the type of business, the number of floors and preferably square footages of the building and site. Of course, more detailed information ensures a more accurate estimate and we may ask for additional information to clarify our understanding of your particular project and needs.

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