Building receiving cost segregation study

Why You CANNOT do A Cost Segregation Study Without Utilizing the Tangible Property Regulations

If your cost segregation firm does not FULLY understand the MANDATORY Tangible Property Regulations, you are missing substantial opportunities to reduce your taxes.

Moreover, you could be out of compliance with the U.S. Tax Code.

Even the large cost segregation firms, who brag about how many studies they have done, ignore the mandatory Tangible Property Regulations under §263a (1-3). This puts the owner of the building, who trusted a cost segregation firm enough to pay to have a study done, at significant risk. In addition, engineering-based firms do not possess the tax knowledge to perform a cost study correctly.

The Tangible Property Regulations determine if an expenditure on any asset (we will only focus on buildings) must be expensed or must be depreciated. These Regulations took the IRS an entire decade to perfect and are taken very seriously by the Service. As of January 2014, if an expenditure is incorrectly depreciated, the IRS can use §1016-3 (allowed or allowable) to disallow ALL FUTURE DEPRECIATION ON THAT ASSET OR ASSETS.

Suppose a cost segregation study is performed, and expenditures are being depreciated that should have been expensed under the Tangible Property Regulations. In that case, the study is essentially incorrect, and the owner of the building is now at risk.

To make matters worse, there is no three-year statute of limitations on an audit of incorrectly depreciated expenditures. Under case law (see the Churchill case), the Service can audit a depreciated asset for the entire class life of that asset. For example, if an HVAC compressor should have been expensed under §263a, that asset can be audited for 39 years and disallowed.

How can you protect yourself?

Choose your cost segregation partners based on tax experience and NOT ON PRICE. Additionally, A cost segregation study sold to you by a 1099 representative without tax knowledge could cost you hundreds of thousands of dollars in disallowed depreciation.

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.