If your cost segregation firm does not understand U.S. Tax Code, you are probably losing significant opportunities to reduce your taxes.
After being in the industry for over seven years and having worked for a large cost segregation firm, I am dismayed at the lack of tax knowledge that so many engineering-based firms possess (or, more accurately, do not possess).
Here is just one of the opportunities that firms ignore without tax knowledge.
Partial Asset Dispositions. This opportunity is missed on almost all the cost studies I have seen over the last ten years. A Partial Asset Disposition is an expense of the remaining depreciable basis of components disposed of during a renovation. Unless the engineering firm understands the intricacies of Partial Asset Dispositions, they do not even recognize the opportunity and the building owner ends up depreciating “ghost “assets.
For example, an owner of an apartment building owned for five years replaces his roof for $100,000, and under the Tangible Property Regulations, the replacement is a betterment, restoration, or major improvement; the new roof must be capitalized. BUT, and this is a big BUT, what happens to the taxable portion of the old roof? We see most depreciation schedules still have the original roof on the schedule. Why? Because the cost segregation firm does not know that the owner can take the remaining depreciable basis of the old roof and immediately expense it, along with the cost of removal.
The catch? The partial asset disposition MUST be taken in the tax year the renovation was completed. If it is missed, the opportunity is gone. In this simplified example, the owner would have missed a tax deduction of $80,000 and must continue to depreciate both roofs even though the original roof is sitting in a landfill. In addition, both roofs are subject to 1250 recapture when the building is sold.
Also, a partial asset disposition can be done immediately after occupancy. It is not necessary to wait for a subsequent year.
Choose your cost segregation partners based on tax experience, NOT ON PRICE. A cheap cost study, or a cost study sold to you by a representative without tax knowledge could cost you tens of thousands of dollars.
My partner at TPTM, Eric P. Wallace, is one of the foremost Real Estate CPAs in the country. Choose TPTM to do your cost segregation studies, and you can be assured the partial asset disposition will NEVER be missed.
Kevin Jerry is a nationally recognized expert in Tax Method Changes. He specializes in Cost Segregation, Tangible Property Regulations, and revenue recognition changes. Kevin graduated cum laude from the University of Cincinnati with a Master of Science Degree in Real Estate Taxation. Over the last seven years, he has worked with Eric Wallace on the Tangible Property Regulations with some of the largest property owners in the country.