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

Fact: Cost segregation reduces federal income taxes by converting income that would have been taxed at the ordinary income rate (35% maximum), to income taxed at the capital gains rate (15% maximum). During the ownership period, cost segregation generates additional depreciation, thus reducing the income taxed at 35%.

Upon sale, the property owner and tax preparer will allocate the sales price. In most cases, short life property such as carpet, vinyl tile and paving have depreciated and the smallest value of these assets (at the time of sale) equals their depreciation cost basis. In this event, the additional depreciation is taxed at the capital gains rate. Hence, the real estate investor gains both tax reduction and tax deferral.

Fact: This is no longer the case. Cost segregation used to cost $20,000 to $50,000 per property and was only financially feasible for very large properties. Today, the fees for cost segregation studies have fallen markedly due to the entry of more knowledgeable real estate professionals in this field and more efficient approaches to staffing the analytical process. It frequently makes sense to conduct a cost segregation study if the cost basis of the property is at least $500,000.

Fact: Not true. The IRS published the Audit Techniques Guide, a 100-plus-page manual regarding the background and proper methodology for a cost segregation report. The IRS encourages a properly prepared cost segregation study since it generates more accurate accounting. In private correspondence, IRS staff has indicated a cost segregation study does not increase the chance of an audit.

• Convert regular income to capital gains income



• 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