Many commercial property owners do not realize that cost segregation can be applied to existing property and renovations, as well as planned ones, as long as the property was placed into service or purchased after December 31, 1986. Any additional depreciation not taken in the previous years (even those closed by the statute of limitations) can be deducted in the year of the study.

Do you qualify for a cost segregation study?

• Constructed your building or facility after 1986. Acquired your building or facility that was constructed before 1986, but was purchased in a taxable transaction after 1986

• Renovated, remodeled your building or facility after 1986

• Made additions to your building or facility after 1986

• Participated in Lease Hold Improvement in a commercial property that you do not own

Clients who have purchased or constructed a facility since January 1, 1987, with capitalized costs in excess of $1,000,000, or who have made leasehold improvements in excess of $500,000, will likely benefit from having a cost segregation study performed. The taxpayer must also plan on retaining the property for the next few years and have net income that is currently taxable.

While the IRS puts no limitation on the number of years a building owner is allowed to go back and reclaim the depreciation lost by not utilizing a cost segregation study (Rev. Proc. 2002-19), generally it is not advantageous to go back further than 1987, as most of the building has already been depreciated. Nearly any type of commercial property qualifies, including office and industrial buildings, apartment complexes, retail centers, manufacturing facilities, restaurants, auto dealerships, hotels, and medical facilities.

For taxpayers who are embarking on a new construction project, cost segregation is an especially timely topic, thanks to the Jobs and Growth Tax Act of 2003, which increased bonus depreciation on personal property in the first year from 30% to 50% for property acquired after May 5, 2003 and before January 1, 2005.

Most recently, under Rev. Proc. 2004-11, the IRS reversed the two-year waiting period required to change the method of calculation for depreciation on their property, allowing taxpayers to change the method in any year. Previously, if a taxpayer purchased a property and elected to depreciate it over 39 years, they had to wait two years before they could change depreciation methods and utilize a cost segregation study to take advantage of the shorter-lived personal property asset classes. The combined effect of the recent tax law changes make today the ideal time for property owners to have a cost segregation study performed.