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Cost segregation is an IRS recommended and sanctioned reclassifying procedure which allows real estate investors to take advantage of accelerating depreciation on their property which will reduce their current income tax liability.

Heres how it works.

When an investor purchases or constructs a property the IRS allows them to write off or depreciate the property over time (typically 39 years for commercial property:office buildings,shopping centers,restaurants etc.. and 27.5 years for residential,such as rental houses,duplexes or apartments).This write off is taken equally each year and is used as an income tax deduction.The investor takes the purchased price excluding the land value as the "basis"or beginning value.This is called "straight line" method of depreciation.

How cost segregation benefits an investor.

Instead of taking the entire value and depreciating it equally each year over long life (39 or 27.5 years) a cost segregation study allows the investor to "carve out" components of the building and depreciate them over a shorter period.

Some investors will assume their CPA is already breaking out these components which the CPA generally cannot do themselves.

In order to take advantage of cost segregation the IRS requires the investor to have an engineering study performed (written report) to document the assets and their values using specific guidelines for the correct asset classification.This requires construction engineering and tax expertise.Most major accounting firms ("big four" or large reginal firms) have a cost segregation practice igneous which consists of CPAs and engineers.However,the majority of CPA firms do not have engineers on staff to perform these studies.

David Hitchcock is the Owner/Broker of MortgageCerv Financial.MortgageCerv specializes in small business loans and commercial real estate loans.MortgageCerv has now added cost segregation studies to its financial product line.If we could be of assistance to you or answer any questions,give David Hitchcock a call @ 478-451-9977.