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Federal Tax Reduction Answers about Cost Segregation - O'Connor & Associates



» What is cost segregation and how is a report prepared?
» What are a few of the short-life items?
» Will cost segregation lead to a requirement for Alternative Minimum Tax?
» Can my CPA do this?
» Do I qualify?
» Will this study work on rent houses and my residence?
» What is my first year savings potential?
» What happens if I renovate during a tax year? How is the demo cost handled?
» Is cost segregation a red flag for an audit?
» How much of my time is needed to get started?
» Why havenít I ever heard of a cost segregation study?
» What are O'Connor's credentials?
» Whom can I contact if I have more questions?
» Why is your report fee so much lower than the competition?
» How often are you successful?
» Will an appraiser review my property?
» What property types merit cost segregation?
» Is cost segregation location sensitive? Is it more effective in large cities or smaller cities? Is it more effective in suburban areas or central business districts?

Q: What is cost segregation and how is a report prepared?

A: Cost segregation is a specialized and powerful tool that accurately allocates commercial property components for federal income tax depreciation calculations. This includes land, 5, 7, 15, 27Ĺ and 39-year items. Commercial property owners frequently increase annual depreciation by 50%, thus lowering taxable income. Depreciation is a meaningful non-cash federal income tax deduction. Commercial property investors affect income tax reduction in a cost-effective manner.

O'Connor & Associates works closely with your CPA or financial/tax manager to collect existing data and documents regarding the commercial property. To prepare a report, an appraiser inspects the commercial property to identify eligible items, then calculates their value and allocates each to its correct depreciation life, according to IRS rules and a series of court decisions. We typically find 30-40 items that qualify for short-life depreciation. We also value the commercial property site if requested.

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Q: What are a few of the short-life items?

A: Carpeting and vinyl tile (but not ceramic tile) are 5-year property. Driveways and landscaping both are 15-year property.

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Q: Will cost segregation lead to a requirement for Alternative Minimum Tax?

A: Most likely no. There are many factors to be considered in the determination of Alternative Minimum Tax. Cost segregation by itself would not be the cause for the Alternative Minimum Tax. We would work closely with your tax practitioner to determine the extent that the AMT could be affected by cost segregation.

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Q: Can my CPA do this?

A: Most CPAs rarely or never appraise commercial property and may not have an in-depth knowledge of the types and range of depreciation lives of commercial property components. Cost segregation correctly accounts for the various components of commercial property so depreciation can be accurately calculated. OíConnor & Associates annually appraises thousands of commercial properties and has an in-depth knowledge of the nuances of the depreciation lives of commercial property components.

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Q: Do I qualify?

A: Yes, if you pay income tax and if you bought or built an improved commercial property since 1986, excluding your home or raw land. And, you can keep benefiting from year to year. The largest savings occur in years 1-5 and lesser savings are typically realized in years 6-15. Even 1031 purchases qualify.

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Q: Will this study work on rent houses and my residence?

A: The study will work for rent houses, but not for your residence.

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Q: What is my first year savings potential?

A: Due to our modest fee, clients typically achieve anywhere from a 4:1 to 50:1, or more, ratio of first year tax savings to cost of the study. First year tax savings is highly dependant on the amount of depreciable basis in a property, number of years owned prior to cost segregation, and the type of property being studied. First year income tax savings achieved for an apartment complex with a depreciable basis of $4 million was $200,000; a portfolio of office buildings saved $4.5 million; and a portfolio of 8 retail centers and apartment buildings saved $1.4 million. Multi-year pay-back ratios of 20:1 to 100:1 over 5 years are frequently reported among our clients. Since we prepare a complimentary preliminary analysis of the additional depreciation and tax reduction (from cost segregation), you know approximately how much savings you will receive before even engaging us for the project.

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Q: What happens if I renovate during a tax year? How is the demo cost handled?

A: If you demolish a portion of the commercial property, it may be justifiable to actually write off the adjusted depreciable basis in the demolished assets at that time. We can work closely with your tax practitioner to determine the deductibility of such assets as well as income tax benefit of doing so.

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Q: Is cost segregation a red flag for an audit?

A: No, it accurately applies IRS rules and regulations. Using cost segregation is considered a conservative approach to more correctly reflect taxable income. In fact, our report provides back-up documentation upon which tax return preparers can rely. O'Connor & Associatesí methodology has been successfully reviewed by IRS Field Auditors.

We can also provide your tax preparer guidance for completing the appropriate federal tax form.

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Q: How much of my time is needed to get started?

A: You will need to provide us the cost basis, site plans floor plans, and any construction cost items for your commercial property (if newly constructed or recently renovated or improved). The most recent depreciation schedule will contain much of the information needed. We require a short amount of time to review these documents with you before starting the project (usually 10-15 minutes). This can be done in person or by phone. Besides a brief amount of time with your designated property site contact, this is really all the time required from our clients.

The tax savings are material for owners of commercial property versus a very modest time commitment.

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Q: Why havenít I ever heard of a cost segregation study?

A: Federal income taxes are amazingly complex. Multiple federal tax forms are required to claim all possible tax deductions. The federal income tax code includes thousands of pages addressing a myriad of tax shelters, tax benefits, alternative minimum tax, and other options for tax relief.

This is a specialized but very powerful tool. Historically, most real estate investors have not utilized the report. Instead they have relied on an accountant, rather than include an appraisal specialist in their tax planning decisions.

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Q: What are O'Connor's credentials?

A: In business since 1974, O'Connor & Associates is a nationwide real estate appraisal and services firm currently operating from four major cities in the U.S. More than 140 experienced and trustworthy employees effectively integrate technology and organizational systems to deliver outstanding products and services. Our lines of business include:

  • Federal and Ad Valorem Tax Reduction
  • Commercial Appraisals
  • Research & Consulting
  • Estate and Litigation Support
  • Business Valuation


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Q: Whom can I contact if I have more questions?

A: You may directly contact our Director for Federal Tax Reduction, Mr. Mike Olivares, at 1-877-375-4291. Mr. Olivares can answer your questions and address your concerns. He has helped thousands of commercial property owners reduce their taxes by increasing depreciation deductions through cost segregation.

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Q: Why is your report fee so much lower than the competition?

A: O'Connor has developed an efficient business process to handle a large volume of cost segregation studies while maintaining, and often enhancing, the quality of results. We know exactly what needs to be measured and valued in order to meet the IRS guidelines. We do not "over-engineer" the analysis, staffing or production processes. Your ROI for the report can be significant. Clients receive a higher ratio of tax reduction to professional fees. Our appraisers focus on components offering tax deductions.

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Q: How often are you successful?

A: We are 95% certain we can cut your federal taxes if you acquired your commercial property in 1986 or later and if you are paying federal taxes. After helping the owners of thousands of commercial properties, it has become clear to us the traditional method of depreciating real estate causes owners to overpay federal income taxes since tax deductions (depreciation) are understated.

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Q: Will an appraiser review my property?

A: Yes. An appraiser will visit the site and conduct a detailed review of your commercial property to insure you receive all depreciation you are due.

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Q: What property types merit cost segregation?

A:
  • Airplane hangar
  • Amusement park
  • Apartments
  • Auto dealer
  • Auto service garage
  • Bank
  • Bowling alley
  • Car wash facility
  • Cold storage facility
  • Commercial building
  • Convenient store
  • Country club
  • Day care center
  • Department store
  • Dinner theatre
  • Drugstore
  • Fast food restaurant
  • Funeral home
  • Health spa
  • Hospital
  • Hotel
  • Medical condominium
  • Medical facility
  • Mobile home park
  • Movie theatre
  • Nursing home
  • Office
  • Office building
  • Restaurant
  • Retail condominiums


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Q: Is cost segregation location sensitive? Is it more effective in large cities or smaller cities? Is it more effective in suburban areas or central business districts?

A: Cost segregation is not location specific. It works in the nation's largest cities, such as
  • Atlanta, GA
  • Baltimore, MD
  • Boston, MA
  • Bridgeport, CT
  • Dallas/Ft. Worth, TX
  • Denver, CO
  • Hartford, CT
  • Houston, TX
  • Las Vegas, NV
  • Los Angeles, CA
and in mid-sized cities, such as
  • Akron, OH
  • Albany, NY
  • Albuquerque, NM
  • Allentown, PA
  • Augusta, GA
  • Austin, TX
  • Bakersfield, CA
  • Baton Rouge, LA
  • Birmingham, AL
  • Boise, ID
and in the smallest cities, such as Paris, Texas, and Valentine, South Dakota.

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Corporate Office
2200 North Loop West, Suite 200
Houston, TX 77018
driving directions to all locations
(t) 713.686.9955 / 1.800.856.REAL
(f) 713.686.3377
For general questions not related to property tax, e-mail us.
For property tax questions e-mail the Property Tax Department.
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