Frequently Asked Questions

While our studies are based on engineering analysis and IRS guidelines, we understand you may have questions about specific classifications. If you disagree with certain component classifications, we can review the engineering rationale and supporting documentation. Minor adjustments might be possible if you provide additional information about specific assets or their use. However, significant departures from engineering standards could compromise the study's defensibility.

You can choose to be more conservative than the study recommends by treating some personal property as structural components, though this reduces your tax benefits. We provide detailed documentation explaining each classification decision, which your CPA can review. Remember that our studies include audit defense, so we stand behind our engineering conclusions. If you have specific concerns, it's best to address them before finalizing the study.

Since land itself cannot be depreciated, the allocation between land and building directly impacts the results of a cost segregation study. It’s important to note that we do not determine or participate in setting the land allocation — our analysis is based on the land value provided by the county/tax records or provided by the client.

If you believe the land and building allocation on your records is inaccurate, you can engage a qualified third party, such as a certified appraiser, to provide an independent valuation before the study is completed.

Section 179 and cost segregation serve different purposes and can actually be used together strategically. Section 179 allows immediate expensing up to $1,220,000 (for 2024) of qualifying property, including certain qualified real property improvements like HVAC systems, roofs, fire protection systems, and security systems placed in service after the building was first placed in service. However, Section 179 has income limitations requiring sufficient business income to use the deduction.

Cost segregation, on the other hand, identifies and reclassifies components throughout the entire property without dollar limits. The two strategies complement each other - you might use Section 179 for specific qualifying improvements while using cost segregation for the overall property analysis. Note that if you take Section 179 on certain components, those must be excluded from the cost segregation study to avoid double-dipping.

Self-storage facilities have characteristics that make them particularly favorable for cost segregation. These properties typically feature a high percentage of site improvements including driveways, parking, and outdoor lighting. Security systems, fencing, and gates represent significant short-life property investments. The buildings themselves often have minimal interior finishes, meaning a higher percentage of the cost relates to reclassifiable components.

Climate control systems, where present, add to the reclassification potential. It's common for self-storage facilities to achieve 30-40% reclassification rates, making them excellent candidates for cost segregation. When planning expansions, consider the timing of cost segregation studies to maximize benefits across different phases of development.

Healthcare properties have unique aspects that often make them excellent candidates for cost segregation. These properties typically contain specialized electrical and plumbing systems installed specifically for medical equipment, medical gas systems throughout the facility, lead-lined walls in X-ray rooms, dedicated HVAC systems for clean rooms or surgical suites, and extensive millwork and cabinetry for operatories and laboratories.

As a result, medical and dental offices often achieve 25-35% reclassification rates, with equipment-heavy practices seeing even better results. Don't forget to consider Section 179 expensing for qualifying medical equipment purchased separately from the building.

State treatment of cost segregation and accelerated depreciation varies significantly across jurisdictions. Some states don't conform to federal depreciation rules and require separate depreciation schedules using different methods or recovery periods. Bonus depreciation rules particularly vary, with some states allowing full federal bonus depreciation, others allowing partial amounts, and some allowing none at all.

Many states have decoupling provisions that became effective at various points over the past decade. These differences require careful planning, including reviewing each state's specific rules where you have tax obligations, potentially needing state-specific considerations in your study, addressing multi-state allocation issues for properties or businesses operating in multiple states, and tracking the growing differences between federal and state tax basis. Professional guidance is often essential for multi-state property owners.

Yes, cost segregation applies to leasehold improvements with some special considerations. Leasehold improvements are depreciated over 39 years for nonresidential property, or over the lease term if it's shorter than the applicable recovery period. Qualified Improvement Property may qualify for bonus depreciation under current law, making it particularly attractive for cost segregation.

Tenant improvements can be studied regardless of who pays for them, and the fact that improvements will eventually revert to the landlord doesn't eliminate the current tax benefits for the tenant. For ground leases, improvements built on leased land qualify for cost segregation using the appropriate recovery periods regardless of the lease term. However, you should consider whether certain costs should be amortized over the lease term rather than depreciated.

Distinguishing between repairs and capital improvements is crucial for tax treatment and cost segregation eligibility. Capital improvements that qualify for cost segregation include betterments that improve the property beyond its original condition, restorations that return property to working order after it has fallen into disrepair, and adaptations that ready the property for a new or different use.

Examples include new HVAC systems, roof replacements, additions to the building, and comprehensive kitchen or bathroom remodels. In contrast, repairs that are deductible in the current year include routine maintenance activities, fixing existing components without upgrading them, painting, patching, minor replacements, and work that simply keeps the property in ordinary operating condition.

Several safe harbor elections can simplify these determinations, including the de minimis safe harbor allowing immediate expensing of items under $2,500 or $5,000 with an applicable financial statement, the routine maintenance safe harbor for qualifying maintenance activities, and the small taxpayer safe harbor for buildings with an unadjusted basis under $1 million.