» What is cost segregation and how is a report prepared?
» What are a few of the short-life items?
» What is the difference in accelerated depreciation and increased depreciation?
» 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 haven’t 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, 27˝ 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: What is the difference in accelerated depreciation and increased depreciation?
A: Cost segregation accurately allocates asset value from longer-life to short-life commercial property. You then may choose the method of depreciation (i.e. type of depreciation) -- either straight-line or accelerated. Unlike cost segregation, accelerated depreciation involves using a table that shifts a higher percentage of the depreciation deduction to the early years of an asset's life. Many taxpayers avoid accelerated depreciation because of its possible Alternative Minimum Tax (AMT) consequences.
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Q: Will cost segregation lead to a requirement for Alternative Minimum Tax?
A: No! It is more accurate and appropriate to correctly allocate the cost basis of your commercial property instead of arbitrarily dividing it between land and long-life assets, (which is what occurs for most taxpayers). Alternative Minimum Tax (AMT) is caused by electing accelerated depreciation. (See previous answer). You can choose between either straight-line or accelerated depreciation. Cost Segregation will reduce your taxes by increasing tax deductions.
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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. O’Connor & 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 a 4:1 to 50:1 ratio of savings to cost, depending on the type of commercial property and its construction characteristics. First year income tax savings achieved for an apartment complex were $200,000; portfolio of office buildings saved $4.5 million; and a portfolio of 8 retail centers and apartment buildings saved $1.4 million. This is based on our company experience that includes having prepared hundreds of cost segregation reports. As a result, 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 tax deductions (due to depreciation) and tax reduction, you know approximately how much savings you will receive.
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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, the cost basis of that portion of the commercial property can be expensed.
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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 & Associates’ 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 for your commercial property or a few details on new buildings or recent improvements and, in some cases, the depreciation schedule from your last tax return. Then, we'll spend 10 to 15 minutes to discuss this information with you by phone and schedule a site visit.
The tax savings are material for owners of commercial property versus the modest time commitment.
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Q: Why haven’t 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. Larry Brewster, at 1-800-856-7325. Mr. Brewster can answer your questions and address your concerns. He has helped hundreds of commercial property owners reduce their taxes by increasing tax deductions.
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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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