Documentation is one of the most important steps in the Cost Segregation process. It provides detail when setting up your study, paints a clear picture for the real estate analyst and engineering team, as well as backs up a study in the event of an audit. In this blog, we will review the key documents needed to complete the cost segregation study.
Closing or Settlement Statement
Upon purchasing your property, you will receive a Closing/Settlement Statement. This confirms the purchase price and legal owner of your property while including any Title Changes and Recording Fees that can be factored into the study.
Most Recent Fixed Asset Report (if applicable)
The Fixed Asset Report details the various assets owned by the taxpayer and being depreciated as part of their investment or business properties. It includes the original property basis, categorizes each asset (based on their class life), and provides the current and accumulated depreciation.
Appraisal Report (if available)
Before a purchase is completed, an appraisal may be completed either to understand the market value or for the bank as part of their due diligence and documentation. This provides the most accurate assessment of your property's value as well as important information like what existed at the time of purchase. This will help our engineering team conduct a thorough and precise Cost Segregation Study.
Rental Type (Residential Properties)
Let us know if your residential property is used for short-term rentals (like Airbnb) or long-term rentals (traditional leases).
G-702/703
If you made improvements to your property and used a General Contractor, there may be a G-702/703 that lists out the details of the project. These documents identify the contract price, how much has already been paid, and a “schedule of values” that breaks down the work completed.
If you do not have this documentation, we request that a General Ledger must be provided to detail out the work completed and cost per item. Included in this should be an invoice date & number, vendor, description of work, and amount.
1031 Exchange
If you purchased your property through a 1031 Exchange, there will be a deferral of gains. Your CPA will complete the calculation to determine the account of deferred gain and new adjusted basis for the purchased property. The new adjusted basis will be used to conduct your Cost Segregation Study. Ask your CPA to calculate this if they have not already.
Inspection Report (if available)
This report provides detailed information about various building systems, including HVAC units, electrical load and panel details, and gas distribution. It helps our engineering team identify existing systems to include in the analysis. While an inspection report is not always completed before purchasing a property, it brings value to Cost Segregation if you have one.
Construction Drawings
For any new construction or improvements where a General Contractor was used, there will be construction drawings. It is very important to locate these for our engineers as they provide extensive detail regarding your property. A complete set of drawings will include a cover page, general, demo plans, civil, structural, architectural, mechanical, plumbing, and electrical.
Condo Association Documents
This is specific to condominiums, but provides important information. There is a percentage of ownership assigned to each unit for the common areas and land improvements. Since you own a small portion of everything in the complex, we need this document to accurately assign your ownership. Reach out to your HOA if you are having trouble locating this documentation.
As you can see, documentation covers a lot of ground in a Cost Segregation Study. While we understand it may be difficult to provide everything, a deep analysis of documentation along with a thorough onsite creates the perfect scenario for accuracy. However, where information is missing, a study can still be performed to generate additional deprecation and ultimately increase cash flow.
Join us!
Sign up for our free Cost Segregation 101 webinar on December 10th: Increase your Cash Flow
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Edited by Randy Eickhoff, CPA, Founder & Head Coach at Acena Consulting. Photo courtesy of Kevin Krejci on Flickr.
