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John Gerlach Accounting and Tax Preparation Services

Accounting, Auditing and Tax Preparation Services

John Gerlach & Company LLP

37 West Broad Street- Suite 800

Columbus, OH 43215

 

Phone: (614) 224-2164

Fax: (614) 224-1391

- Specialized Services

Cost Segregation

Cost Segregation is the process of separating the costs of personal property, depreciable over 5 to 15 years, from building acquisition or construction costs. Because building costs are depreciated over 27.5 to 39 years, this can result in significantly increased depreciation deductions in the early years of a real estate project. John Gerlach & Company has extensive experience leading Cost Segregation projects within Central Ohio ’s commercial real estate community.

 

The principal benefit of cost segregation is that the taxpayer receives accelerated tax depreciation deductions. Where a building has been placed in service prior to the current year, the taxpayer can also “catch-up” for depreciation deductions that could have been taken in prior years. Accelerating current and future depreciation deductions or catching-up for prior year depreciation deductions may result in lower current income taxes, increased cash flows, and benefits related to the time value of those tax savings. Because cost segregation can be performed for buildings acquired or constructed since 1986, the amount of depreciation that can be accelerated may be substantial.

How Cost Segregation Works

 

Typically, a cost segregation study results in reclassification of approximately 15% to 40% of building and improvement costs as property depreciable over 5 to 15 years, as opposed to 27.5 to 39 years. Factoring in the deferral of federal and/or state taxes due to the acceleration of tax depreciation deductions, the present value benefit can be approximately 20% of the costs reclassified to shorter depreciable lives.

 

For example, assume a $5,000,000 building is currently being depreciated over 39 years. If the cost segregation study results in a reclassification of 30% of the building cost, or $1,500,000, to shorter depreciable lives, the present value of accelerating tax depreciation deductions, deferring taxes, and the increase in cash flow would be approximately $250,000.

Who Can Benefit?

Buildings with the greatest potential for savings include:

 

  • Apartment Complexes
  • Auto Dealerships
  • Banks
  • Hospitals, Clinics and Medical Offices
  • Industrial and Manufacturing Facilities
  • Long-term Care Facilities
  • Office Buildings
  • Restaurants
  • Recreation and Sports Facilities
  • Retail Chains
  • Shopping Centers
  • Supermarkets