Cost Segregation Meaning and its Benefits!
Cost segregation meaning can be easily learned that it is a criterion for identifying assets with their costs and ordering those assets according to federal tax purposes. Cost segregation enables to classify the commercial building costs as a personal property or land improvements, which were previously being rated as a 39-year depreciable life, in relation with a 5, 7, 15-year rate of depreciation with the help of accelerated method. The buildings used for residency including those for multi-family are based on a 27.5 years life. This engineering-based study prevails the building owners to depreciate the new or already present structure in a short interval of time under the accepted and existed tax laws.
The benefits are clear by the cost segregation meaning and idea.
• An immediate increase in cash flow
• A reduction in current tax liability
• The deferral of taxes
• The ability to re-claim “missed” depreciation deductions from prior years (without having to amend tax returns)
Cost Segregation Meaning in Terms of Real Estate
This engineering-based cost segregation helps and allows the commercial real estate owners to replace the real property to personal property. By this, it is seen that a considerably short depreciable tax life and augmented depreciation method prevail.
Need for a Specialist
The engineering-based cost segregation is so necessary that IRS makes it as a requirement for both new and existing properties so that maximum depreciation benefits can be taken. Engineering-based cost segregation allows the property information under the precise segregated condition and ensures full information and detailed support with a documentation to the CPAs so that they meet the strict IRS regulations and requirements for Audit works.
The IRS Cost Segregation Audit Techniques Guide (ATG) says, “preparation of cost segregation studies requires knowledge of both the construction process and tax law involving property classifications for depreciation purposes. In general, a study by a construction engineer is more reliable than one conducted by someone with no engineering or construction background. Experience in cost estimating and allocation, as well as knowledge of the applicable tax law, are other important criteria.”
Items Included in Cost Segregation
The engineering-based cost segregation study offers you to identify and re-classify many components of a building, such as electrical installations, plumbing, mechanical components, and finishes, into shorter-lived asset classes. This way significant savings can be made to the client.
The Idea Behind Cost Segregation
Cost segregation meaning work on the criteria that states that “a dollar today is worth more than a dollar tomorrow”. In terms of cost segregation, the idea can be modified as “a tax deduction today is worth more than a tax deduction tomorrow”. Property owners can see that by increasing the building’s depreciation, the tax liability decreases which in turn substantially increases the cash flow. The huge cash flows, as because of the delaying tax payments, can be used for other investments.
The IRS’s Audit Techniques Guide (ATG)
Cost segregation must follow some IRS rules and regulation through their agents, for that, IRS proposed some guidelines at the end of 2004 by recognizing the policies needed for asset allocation. By reviewing the various characteristics required for the good study, the IRS guidelines state, by keeping in view the detailed engineering approach, “in general, it is the most methodical and accurate approach, relying on solid documentation and minimal estimation.”
So, as for the concluding points and by the detailed cost segregation meaning, it can be said that cost segregation studies are one of the finest services available for the commercial real estate owners and provide valuable tax strategies. By these tax strategies, the owners find it easy to defer taxes, ease the complete and current tax burden, and free up capital by revitalizing their recent cash flow.