Cost Segregation

Cost segregation is an IRS-approved tax strategy involving a comprehensive analysis of capital expenditures for a new, expanded, or purchased building.  Arthur Consulting Group’s COST SEGREGATION practice has completed more than 10,000 studies, resulting in around $7 billion in benefits for our clients.  Because of our pioneering work and a reputation for unbiased analysis, we have also consulted for taxing authorities on disputes related to the proper classification of a property unit.

Cost segregation involves the identification of Section 1250 assets that can be reclassified as Section 1245 personal property assets for tax reporting purposes.  As defined by the IRS, Section 1245 personal property is a shorter cost recovery period property (3, 5, or 7 years), and Section 1250 property is a longer cost recovery period property (15, 31.5, or 39 years).
Following IRS methods and protocol for cost segregation, there is a large tax-savings premium for valuing Section 1245 personal property as high as possible.  In addition, property taxes can be lowered, since short-lived personal property will devalue more rapidly than real estate and therefore generate less tax over its depreciable life.

The definition of personal property expands beyond the category of furniture and movable equipment.  Our examinations often reveal that personal property assets are buried in real estate assets.  For example, a hospital may require structural modifications of equipment for a specific function, i.e. specialized heating, cooling, or electrical components for medical equipment; these are considered personal property.  In a retail building, flooring and cabinetry often qualify as non-permanent personal property.

The IRS also allows “catch-up” on under-reported depreciation for prior years on property placed in operation as far back as 1987.   For retroactive studies, all benefits are recognized in the year of application. The benefits of a cost segregation study can also be increased if the timeframe falls within a bonus depreciation time period.  

“The US Department of Treasury states that ‘cost segregation is a lucrative tax strategy that should be used in almost every major purchase of commercial real estate.’”  Wall Street Journal, June 2003

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