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Reduce Tax through Cost Segregation: Commercial Property Analysis

Reduce Tax through Cost Segregation"Next to being shot at and missed, nothing is really quite as satisfying as an income tax refund.” — F. J. Raymond, humorist

Did you know that in 1997 the IRS approved a tax strategy (Cost Segregation) that allows specific real property assets that typically receive a depreciation life of 39 years (commercial real property) or 27.5 years (commercial residential property) to be reclassified as tangible personal property with a depreciation life of 5 years or land improvements with a depreciation life of 15 years?

Because this improved IRS treatment enables portions of the electrical, plumbing, mechanical systems, site improvements and hundreds of other components to be assigned shorter asset lives, immediate cash flow for your business can be realized.

Increased Cash Flow – How Much?

It is estimated that cost segregation offers roughly $150,000 in additional depreciation for every $1MM of purchase or construction cost versus the normal 39 year straight line depreciation method.

By utilizing accepted IRS procedures for the reclassification of assets, and supporting the reclassification and depreciation deduction with thorough engineering or architectural analysis, taxpayers are able to recover 18% - 40% of the building cost over the first 5 years versus depreciating it over 39 years (or 27.5 years). This increases the taxpayer’s depreciation expense in today’s dollars, which delivers a significant reduction in tax and offers these additional benefits:

  • Frees up cash for investment in profit generating activities
  • Increases business cash flow to maximize bank financing
  • Reduces insurance premiums

Tax Refund – Is It Possible?

Completing a ‘lookback’ analysis may generate a tax refund. A ‘lookback’ cost segregation study seeks to identify and capture unclaimed depreciation back to the date the asset was acquired.

Support for Cost Segregation

More than 300 rulings, letters and IRS Memoranda have provided documentation and case law that supports Cost Segregation as an accepted, viable tax strategy. The best cost segregation firms adhere to strict IRS rulings and requirements and utilize the latest tools, methods and procedures to deliver detailed, accurate reports.


  • Commercial property owners must have a federal tax liability and who intend to hold the property for at least two years
  • Any building (land excluded) with $500,000 or more in purchase or construction costs that was placed in service after January 1, 1987
  • Any building with $250,000 or more in leaseholder improvements since January 1, 1987
  • Existing buildings with planned or in progress renovations, remodeling, restorations or expansions

Ideal Types of Commercial Properties

Resorts Medical/Surgical Office Buildings
Restaurants Warehouses Marinas
Residential Rentals Hospitals Automobile Service Centers
Hotels Day Care Centers Shopping Centers
Nursing Homes/Assisted Living Auto Dealerships Industrial
Laboratory/Research Fitness Centers Distribution Centers
Airport Hangars Manufacturing/Processing Banks
Department Stores

Before Construction

A commercial property analysis can also be completed as part of the pre-construction planning process to recommend modifications to the building design to increase the portion of the building cost that receives a shorter life asset classification.

Before Demolition or Rehabilitation

A cost segregation study can also be performed prior to the demolition of a building. By following the established IRS rulings and requirements, the property owner can identify components of the building which can be reclassified to shorter asset lives thereby allowing the owner to write them off versus capitalizing the assets, which results in a substantial reduction in tax.

Components That Can Be Reclassified

The aspects of your commercial property that can be reclassified may surprise you. Here are some examples:

  • Building site improvements such as parking lots and landscaping
  • Light fixtures
  • Branch wiring
  • Special plumbing
  • Flooring
  • Millwork
  • Electrical
  • Partition walls
  • Cabinetry
  • Furnishings
  • Shelving
  • Wall coverings

Armed with Simple’s commercial property analysis, you’re sure to dodge at least some tax bullets allowing you to put more of your money where it belongs: in your pocket.

1 responses to "Reduce Tax through Cost Segregation: Commercial Property Analysis"
  1. CGA Vancouver
    09-Apr-2013 10:09 PM

    I really enjoyed while reading you post. I am sharing it with my other friends as the information is really very useful. Keep sharing your excellent work.

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