Cost Segregation

By White, Paul L. | Journal of Property Management, November/December 2008 | Go to article overview
Save to active project

Cost Segregation


White, Paul L., Journal of Property Management


Recovering costs to maximize income tax savings

Every property and asset manager has the responsibility to continually improve the cash flow and value of the assets for which they are responsible. With several federal tax court decisions, we now have a valuable tool for increasing the after-tax cash flow of almost any commercial property. Through using cost segregation studies, owners can accelerate depreciation on many components of their properties over 5-, 7- and 15-year life periods.

THE HISTORY

With the passage of the Tax Reform Act of 1986, Congress changed how commercial real estate owners could depreciate their properties from several methods of accelerated depreciation to basically straight line depreciation, with residential properties having a life of 27 ½ years, and other commercial properties 31 ½ years. In 1993, the commercial properties were changed to 39 years. These changes had a significant impact on the after-tax cash flow for owners and contributed to the savings and loan crisis of the late 1980s.

In 1996, Walgreens (Walgreens Co. & Subs. v. Commissioner, 103 T.C. 582, 1994) won its challenge before the U.S. Tax Court to the practice of using a 39 ½ year costrecovery period for the improvements in its new free-standing stores, arguing that some of the fixtures and improvements in them should be classified with a shorter life.

The IRS acquiesced to this and other similar rulings; however, the judge modified his ruling to state that "in order for the cost segregation study to meet the minimum guidelines, the study had to be completed by individuals competent in construction or building techniques."

From 1997 to 2004, no clear guidelines existed for engineers to follow in conducting such studies; each study had to be extensive and exhaustive to meet the unknown requirements of the IRS. Few property owners could justify such studies.

In 2004, the IRS issued guidelines on what to look for in a cost segregation study, ultimately eliminating a great deal of unnecessary work for all involved.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Cost Segregation
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?