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What is Cost Segregation?

Cost segregation is the process of reclassifying building costs, which are subject to a shorter tax life due to their special use. Architects and engineers determine the functions of these assets, and I rely on specialist firms to make this determination and to determine who will prepare the reports. These reports conform to the requirements of the Internal Revenue Code and Regulations that govern this classification.

Benefits of Cost Segregation Studies

The benefit of a cost segregation study is that it enables taxpayers to deduct costs that are determined to be subject to a shorter life. In this way, the tax benefits can be received sooner. 

Failure to conduct this type of study results in taxpayers receiving delayed tax benefits, while the total depreciation deduction over the life of the asset is the same. For example, a $100,000 asset will result in a total depreciation deduction of $100,000 either over the shorter or longer life of the asset. Good financial practice says that, within the law, taxpayers should use the shortest life. 

Note that currently, smaller taxpayers can claim many expenditures that would ordinarily be deductible over longer lives. However, this provision expires in 2025. Equally important, it’s necessary to maintain a separate ledger for property tax purposes, since assessors will not accept a $0 value on the property tax rendition.

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