I've been a CPA for nearly 20 years - serving private small business and real estate the entire time. I take the lessons learned in serving and now running a small business and share them here. For business owners, investors, and advisors looking to lower their cost of capital, subscribe for delivery straight to your inbox ๐ Also on YouTube at PlugAccountingandTax!
Putting You on Game: Cost Seg Studies
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Probably 10 years ago, I sat on a call with a very wealthy family out of Chicago ๐ข who owned a lot of real estate. Hundreds of millions of dollars worth - all owned by the family (no outside capital). Their portfolio ranged from retail, high rises, multi-family, and some restaurants - mostly bought up by their father and just passed down. We were gunning for the work and they shared a few sample returns for review. One thing we noticed was their depreciation schedules looked off. ๐ I brought it up on the call and recommended running cost segregation studies on the properties to really nail down how much bonus depreciation was available - as the asset classes didn't really look like they'd been broken down that well.
"Oh we've already used cost seg studies. Our CPA told us we can rely on a study we paid for 5 years back and just apply that same method across the portfolio."
"Excuse me? โ Do you remember what kind of property that first cost seg was on?"
"Yea, I think it was one of our restaurants. But it's basically all the same right? And it saved us those cost seg fees every time"
Speechless. ๐ง A family worth 9 figures fretting over a few grand one-time charge - risking millions in deductions. Today we're digging into their half-truth - do you really need a new cost seg study for every building you buy and own? How a Cost Segregation Study WorksIn a period of 100% bonus depreciation, it's pure rate arbitrage and timing. Cost seg studies apply various tactics to properly classify the property into more accurate classes of assets ๐ - each with different depreciation rules. Usually when a property is purchased, the buyer will record (1) Land (hopefully), and (2) Building. The land is not depreciable, and the building is depreciable over 27.5 years (for residential) or 39 years (commercial). Neither gets 100% bonus depreciation. But that lump entry of "Building" really includes multiple asset classes that are eligible for (now) 100% bonus depreciation - furniture, landscaping, paving, some fixtures. ๐ฐ So the cost seg study first assesses a realistic land value, relative to building and components. And then uses engineers and other ways to breakdown the sub-components of the building that are eligible for bonus. So Do I Need a New One Every Time?Actually, no. ๐ The IRS Cost Segregation Audit Technique Guide (ATG) acknowledges the uselessness of this. If the properties are "nearly identical in construction, appearance, and use" then you are allowed to "sample" the various types to save fees across the board. Think fast-food, copy and paste style of buildouts, etc. ๐ฎ All of which the end cost seg study would be effectively the same thing over and over again. ๐จ If you are in the market for a cost segregation study for your 2026 acquisitions (or prior!), here's my referral link for 10% off of your first study. It's a depreciation calculator you can use they created based on their engineered studies and asset type. Estimate your tax savings and sign-up โคต๏ธ โhttps://get.recostseg.com/cma5tgโ Back to the Chicago FamilyThat was not the case with these guys. ๐ They were applying a very different cost seg study asset profile across varying types of other properties. And were likely leaving a lot of money on the table. To boot, their properties were in different parts of the city - so the land valuation would be fluctuating. This throws of the depreciable basis for the building and sub components. There is no hard and fast land ratio to use - not 20%, not 25%. The ATG calls for a proper valuation on the land. Absent that, you are allowed to reference the local property tax assessment ratio of land to building and apply that ratio to your property. ๐ฃ I digress - the Chicagoans were way out of line. We shared that tid bit with them and, as can happen when you call out the other guy, they said thanks for looking but we're actually still going to keep with our current guy. Cue the "there won't be a second date, but at least she knows..." meme. ๐ซก Group Chat Worthy Posts ๐ฅ๐ฒ
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I've been a CPA for nearly 20 years - serving private small business and real estate the entire time. I take the lessons learned in serving and now running a small business and share them here. For business owners, investors, and advisors looking to lower their cost of capital, subscribe for delivery straight to your inbox ๐ Also on YouTube at PlugAccountingandTax!
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