When purchasing your first investment property, it is important to think about the benefits you can gain from a Cost Segregation Study. In this blog you will find a breakdown of what key steps and considerations to expect.

Is a Cost Segregation Study right for you?

• Property type: Cost segregation studies are most effective for commercial properties like office buildings, retail spaces, warehouses, and multi-family residential buildings – almost any type of property/building except for your primary residence.
• Property age: Newer buildings or those with recent renovations generally yield greater benefits.
• Purchase date: The sooner you conduct the study after purchasing the property, the better. You can even do a "look-back" study for older properties, but there are some limitations.

What do I look for in a qualified provider?

• Experience matters: Look for a firm with proven expertise in cost segregation, engineering, construction, tax law, and accounting. Ask for referrals or check online reviews.
• Clear communication: Choose a provider who can explain the process clearly and answer your questions in a way you understand.
• Fee structure: Understand how they charge for their services (flat fee, hourly rate, or percentage of savings).
• Audit Support: If you get challenged by the IRS, make sure they can support you and your study findings competently and confidently.

What documentation is needed?

• Property records: This includes deeds, closing statements, purchase agreements, appraisals, construction drawings, and any renovation records.
• Cost information: Gather invoices, receipts, and any other documentation related to the building's construction or improvements.

What is the process for a cost segregation study?

• Feasibility analysis: The provider will first assess if your property is a good candidate for cost segregation, and explain the reasons to you (or why it does not).
• Site inspection: A qualified engineer will likely visit your property to analyze its construction and identify segregable components.
• Detailed analysis: The provider will use specialized software and their expertise to allocate costs to different depreciation categories.
• Report preparation: They'll provide a comprehensive report documenting their findings, which you'll use for tax purposes.

What happens after the study is completed?

• Tax filing: Work with your CPA to incorporate the study's findings into your tax return.
• Record keeping: Maintain proper records of the cost segregation study for future tax years and potential audits.
• Updates: If you make significant improvements to your property, you may need to update the study to reflect those changes.

Any other tips for a first-timer?

• Start early: Don't wait until the last minute to initiate the study. The sooner you do it, the sooner you can reap the benefits.
• Ask questions: Don't hesitate to ask your provider any questions you have throughout the process.
• Understand the limitations: Cost segregation studies are not a magic bullet. They are most effective for certain types of properties and situations.

Join Us!

Join us for upcoming webinars on Cost Segregation and the R&D Tax Credit.

Check out more of our Blog Posts!

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Edited by Randy Eickhoff, CPA, Founder & Head Coach at Acena Consulting. Photo courtesy of Mark Moz on Flickr.