Is Cost Segregation Legitimate?

Advisory bulletins for those involved with real estate -- owners, investors, CFOs, accountants, lenders, brokers and attorneys.

Is Cost Segregation Legitimate? While some things may sound too good to be true, they actually aren’t. Cost segregation is a legitimate method of reducing and deferring federal income taxes through advanced monitoring of depreciation. Many real estate owners are skeptical regarding federal income tax savings from the relatively unknown concept. One of their first thoughts is often, "if this were legitimate, wouldn't my CPA/tax preparer have suggested it?" The federal income tax code is thousands of pages long with arcane tax benefits for various industries. With so many specific areas of concentration among CPAs regarding the federal tax code, it may very well be your CPA isn’t familiar with the process. Cost segregation has slowly evolved since it became available in 1996. It was initially used primarily by "big five" accounting firms as a specialty practice for real estate with a cost basis of at least $10 or $20 million. The adoption rate for cost segregation is still well under 5% even though it has been available for more than 10 years. Reasons for the slow adoption rate include limited information being provided to owners and tax preparers, the dual decision making process for owners/tax preparers to evaluate the concepts, fees for the service and uncertainty regarding the relative risks. The IRS has substantially mitigated the risks of using cost segregation by publishing the Audit Technique Guide (ATG). There should be minimal risk in an audit for a cost segregation report that conforms with the Audit Technique Guide. While it is impossible to eliminate risk, a depreciation schedule prepared by a trained appraiser who complies with the ATG should be less likely to be challenged than the typical depreciation. (The typical depreciation schedule is compiled using guesstimates of land value. The balance of the cost basis is assigned to improvements.) The Audit Technique Guide is more than 100 pages long and has details regarding in excess of 100 items that can be segregated. Trained, experienced appraisers are capable of preparing a credible report that effectively documents this basis for the depreciation schedule. This type of report is the most credible and reliable method of documenting the depreciation schedule. A real estate owner who properly reviews the credibility and qualification for his cost segregation appraisal can expect a credible report and valuable tax benefits. Get a FREE estimate of tax savings on your property! Please send me periodic real estate information. O'Connor & Associates -- Your Key to Real Estate Value Corporate Office: 2200 North Loop W., Suite 200 Houston, TX 77018 1-800-856-7325 Dallas * Houston * Los Angeles * Newport Beach If you would like to be removed from this list and receive no future real estate information, click here to unsubscribe.	Cost Segregation Benefits Reduce federal income tax rate from 35% to 15% Defer federal income taxes Effective for properties with $500,000+ cost basis "Catch-up" under-reported depreciation without filing amended income tax returns Free preliminary analysis (no upfront costs; pay only if you save) About O'Connor & Associates O'Connor & Associates, in business for 32 years, specializes in real estate appraisals, research, and state and federal tax reduction services nationwide. With offices in Houston, Dallas, Los Angeles and Newport Beach, the firm employs more than 130 people. Patrick O'Connor, president, is frequently acknowledged by national publications as a respected source of information on real estate trends. Visit www.cutmyfederaltaxes.com.