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| Cost Segregation is Not the Same As Component Depreciation Cost segregation delivers similar results as component depreciation, but the methodology is different. Component depreciation was used widely in the 1970s and early 1980s, but was terminated by tax law changes in 1986. Component depreciation focused on separating the systems of a building, such as the roof, electrical, plumbing and elevators. These components depreciated over a smaller number of years. Hence, depreciating the components individually yielded substantially higher levels of real estate depreciation compared to depreciating the building as a whole. Rightly or not, there were perceptions that component depreciation had been used in an abusive manner. Part of the Reagan tax changes in the mid-1980s ended the use of component depreciation. Hospital Corporation of America v. Commissioner, 109 T.C. 21 (1997) is the landmark case that defined the general boundaries of cost segregation. Cost segregation focuses on land improvements and interior improvements, which have a shorter period and/or economic life. Land improvements, which can be segregated, include items such as paving curbs, sidewalks, signs and landscaping. Interior improvements that are eligible for short-life depreciation include carpet, vinyl tile, signs, wall coverings and certain electrical and plumbing equipment. The IRS has developed a manual to guide both its auditors and tax practitioners regarding the theory and application of cost segregation, the Audit Technique Guide (ATG). The ATG clearly defines which items qualify for five, seven and 15-year depreciation lives. A well-prepared cost segregation report will delineate up to 50 building components and land improvements from as many as 130 that qualify for short life depreciation. Conversely, a component depreciation analysis might have only identified five to 10 systems. The IRS and ATG require a qualified specialist to prepare a cost segregation study contemporaneously with establishing the depreciation schedule. This can be done when the property is initially acquired or years later if the real estate owners want to recast the depreciation schedule and "catch-up" under-reported depreciation. Prepare for the Year End! » Get a complimentary 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
About O'Connor & Associates O'Connor & Associates is a real estate consulting services firm, conducting business nationwide. Our professional staff in Houston, Dallas, Los Angeles and Newport Beach is available to help you with your tax, business and real estate valuation matters, including cost segregation studies, commercial real estate appraisals, commercial property tax reduction and litigation support. Hire O'Connor & Associates to save thousands through federal and ad valorem tax reduction. Visit us at www.poconnor.com. |
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