Pricing for cost segregation studies can vary widely. In fact, I have seen prices exceed $20,000. But when asking the question – how much does a cost segregation study cost – the answer is: it depends. Let me explain.
Simple SEG offers cost segregation cost studies for single family homes at a flat rate of $299 as long as the cost basis for the rental property falls under $500,000. This is an excellent opportunity for rental property investors to obtain the benefits that cost segregation has to offer at a reasonable price.
But what if your property falls outside our requirements? Then a cost segregation study can get much more expensive. But it still may make a ton of economic sense.
Why Such a Variance in Fees and Pricing?
A cost segregation study can vary in its cost due to complexity, the size of the property, it’s cost basis, renovations and the property’s location. Typical cost segregation study costs will range between $2,000 to $10,000.
While the cost of a segregation study can at first glance seem high and unnecessary, there can be sizeable benefits. The reason is that it enables the investor to depreciate large parts of a property on a shorter timeline rather than the standard 27.5 or 39 years that is normally assigned to investment properties.
Cost segregation will take the building costs associated with the property or the structure and reclassify them into a shorter, more accelerated manner of component depreciation. So you could take some of the costs associated with the construction of your property and reclassify them to have a depreciation life of 5, 7 or 15 years.
The initial building cost basis is divided and allocated into specific categories, such as equipment, furniture, or fixtures. These costs can then be depreciated over a quicker period resulting in greater tax savings during the earlier years of the investment.
Cost segregation works by identifying the personal property assets that are found within the real property assets owned by an investor. The investor will separate out the personal assets in order to report them for tax purposes. The personal assets in this case are considered to be personal property or land improvements.
Personal property represents items such as carpet, window treatments or bathroom fixtures are not generally structural and can be replaced on a regular basis. Renters can cause additional wear and tear on the property and such features may be changed often.
Land improvements can include items that also are not directly related to the maintenance or operation of the land, and that are not directly attached to it. These items are generally found outside of the structure or the building.
Additional Benefits?
Another valuable benefit to cost segregation is the potential ability to write off items that need to be replaced before their full depreciation is achieved.
As an example, consider a rental property that may need a roof replacement down the road. If the initial value of the roof was $20,000 in the cost segregation study, and $5,000 of the roof had been depreciated prior to being replaced. The investor is then able to write off the remaining $15,000 value when it is replaced.
Had the investor not performed the cost segregation study, this loss could not be realized since it had not been clearly identified or separated from the initial value of the rental property.
How much does a cost segregation study cost?
The cost segregation study method is usually better for newer buildings, but it can be used to find hidden tax deductions for older buildings. This can be due to what is called catch-up depreciation.
In order to benefit from cost segregation the property owner should consult with a CPA. They will not only recommend this technique to their customers, they can also review and implement the findings in the required engineering report. You may also require the services of a specialist in cost segregation studies.
These specialists will perform an engineering study of the building, including many of its structural units. They will look at the floors, the walls, the ceilings, the heating system, the cooling system, the electrical work, the plumbing and the telecommunication systems. The specialist or a construction engineer will also look at the mechanical plans of the property, as well as the architectural drawings, the blueprints and the electrical plans of the property.
They will attempt to segregate the mechanical and electrical components that are linked to personal property, as opposed to those connected to the actual property. The other components of the structure or building will also be added to the equation, including the costs associated with any engineering and architectural fees. It usually requires a specialist or a person with a construction engineering background to perform this kind of study.
Whoever performs the study must be knowledgeable in the allocation and estimation of various costs having to do with construction and remodeling properties. The IRS provides criteria for a cost segregation specialist and which credentials a reputable specialist should be able to present to a property owner. Experience and expertise are also very important when it comes to choosing a cost segregation specialist to perform a study on your property.
It is also vitally important to properly document the asset and cost classification to create the proper paper trail for the IRS. This will help reduce IRS questions quickly and easily before they become a problem.
Cost Segregation Tax Benefits
There are number of benefits to running a cost segregation study on your rental or investment property. The first advantage is that it will provide lower taxes for the property owner to pay. This type of study can also help to maximize tax savings because it will reduce the asset’s useable life.
Another advantage to cost segregation is catch-up deductions or retroactive deductions. The IRS changed its laws in 1996 so that property owners can capture retroactive savings on their property immediately. This includes any retroactive savings that were added to the property since 1987.
The new laws allow the property owner to take the entire amount of these savings in the year that the cost segregation study is complete.
Potential Downsides
There may be a few potential downsides to performing a cost segregation study on your property. For starters, this type of study can be rather expensive, and it requires that you hire a cost segregation expert to perform the study for you.
It can also be used too aggressively, which can result in depreciation recaptures and penalties for understating your assets. It is important to tread carefully when it comes to running a cost segregation study on your property.
The benefits of a cost segregation study should be to increase current cash flow by reducing the overall tax burden for the taxpayer to the IRS and local taxation authorities. As long as you hire the right firm you should be very pleased with the outcome of a cost segregation study in the appropriate situation. You must do an analysis to determine if cost segregation is worth it.
Simple SEG has proprietary software that it uses to calculate the value of the components of the rental property and segregate them into the applicable depreciation categories. Such an offer is extremely valuable to the investor and can be very helpful in realizing the value of their property and reducing the tax burden over future years.