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Cost segregation and the tangible property regulations

As the economy continues to rebound, new construction, acquisitions and renovations are occurring with greater frequency, allowing owners to take advantage of tax incentives like cost segregation. In late 2013, the IRS released the final tangible property regulations, which allow for a more detailed study that, in many cases, significantly enhances the benefits of cost segregation. Tax deductions, credits and other government incentives are designed to create opportunities for companies to generate cash that can stimulate further growth. Bonus depreciation applies for many tax years, further increasing the benefit.

 

Cost segregation is a federal tax depreciation strategy that allows a company to increase the short-term depreciation expense deduction by accelerating depreciation on certain components of a newly built or acquired property or property that has been recently renovated. Simply put, cost segregation is an interest-free loan gained by frontloading depreciation rather than spreading it over the full 27.5 or 39-year life of a property.

For a company that holds a building for at least five years, cost segregation is a viable and often lucrative opportunity. A typical commercial building depreciates over 39 years, while multifamily structures such as apartments or nursing homes depreciate over 27.5 years. However, a cost segregation study identifies components of a building that can be allocated into shorter class lives and depreciated faster. These tax lives are dictated by the modified accelerated cost recovery system (MACRS) implemented by the IRS in the mid-1980s. In the case of commercial buildings the most common classes are 5, 7 and 15 years.