Cost Segregation

What is Cost Segregation:
Cost Segregation is an effective tool that allows real estate owners to increase their cash flow by accelerating depreciation deductions and deferring Federal and State income taxes.

In sum, a Cost Segregation Study identifies and reclassifies project related costs that are currently classified as either residential real estate with a depreciable life of 27.5 years, or nonresidential real estate with a depreciable life of 39 years to property, with a five, seven or 15 year life. Reclassification is appropriate because very often, buildings are designed to accommodate specific equipment or land improvements that have shorter depreciable lives.

For example, a restaurant is often designed to accommodate its kitchen equipment, furniture and fixtures, which have five and seven year lives. An industrial building may be designed to accommodate a particular piece of equipment or clean room, to the point where it is difficult to tell what is the equipment and what is the building.

What is the Typical Reclassification:
Based upon our experience, the typical project-related construction costs that could be reclassified from 27.5/39 year real property to either five or seven personal property, or 15 year land improvements, are:

• Offices - 10% to 15%
• Restaurants - 25% to 40%
• Hotels - 25% to 40%
• Retail - 25% to 40%
• Industrial - 10% to 20%
• Manufacturing - 20% to 60%

What are the Benefits from Reclassification:
By reclassifying $100,000 of project related costs of a nonresidential property to a shorter life, the benefits realized could be as follows:

For more information, please contact:
Newport Beach
Steve Milner
Ron Williamson
Manny Trelles

San Diego
Kenneth M. Kasianovitz