SUPER CHARGE YOUR OZ AFTER-TAX IRR WITH COST SEGREGATION
17 of the cost of rehabilitating a commercial or mixed-use property .
• In general , an accounting or consulting firm that specializes in cost segregation should be engaged to perform the cost segregation analysis and issue a report that satisfies the Internal Revenue Service ( IRS ) documentation requirements .
constructed , or renovated a building .
• The process combines engineering , construction , and tax expertise to maximize the value of depreciation tax deductions .
• Instead of depreciating an entire building over 27.5 years ( residential ) or 39 years ( commercial ), a cost segregation study identifies personal property within the structure as well as land improvements around the building that can
Cost segregation is a process that identifies substantial tax-savings opportunities for taxpayers that have purchased , constructed , or renovated a building .
be depreciated over shorter and more accelerated recovery periods .
• In addition , cost segregation helps identify Qualified Improvement Property ( QIP ) which can result in immediate expensing ( via bonus depreciation ) of a significant portion
HOW CAN COST SEGREGATION SUPER CHARGE OZ AFTER-TAX IRR ?
• Outside of OZs , the value of cost segregation is derived from the following :
° Timing differences : Accelerating depreciation deductions makes them more valuable due to the time value of money .
° Tax rate differences : In certain situations , accelerated depreciation deductions may be taxed at a lower rate when the timing difference reverses upon sale of the property .
• In OZs , the value of cost segregation is enhanced because depreciation is not required to be recaptured upon sale to the extent that the 10-year exclusion applies . This dynamic , effectively creates a permanent difference that is not achievable outside of an OZ .
• To the extent that depreciation is accelerated to the period prior to a sale of the building from the period after the sale , a cost segregation study can effectively create deductions out of thin air for a QOF investor , which translates to substantial permanent tax savings . For example , if a QOF sells a commercial building in year 11 , any depreciation deductions that the cost segregation study accelerates from years 12 through 39 into years 1 through 11 , will become a permanent additional tax deduction that would not otherwise be available without a cost segregation study .
• A cost segregation study can often identify shorter depreciable lives on approximately 20 to 30 percent of the real estate . That percentage can be significantly higher for rehabilitated commercial and mixed-use buildings .
• A cost segregation study can also help a building become eligible for OZ tax benefits that would otherwise not have been available . In particular , existing buildings generally must be substantially improved to qualify for OZ tax benefits , which means that additions to the basis of the building must exceed the building ’ s adjusted basis at the start of the 30-month measurement period . A cost segregation study can help reduce the purchase price allocated to the building , lowering the bar for the substantial improvement test .
EXAMPLE OF THE BENEFITS OF A COST SEGREGATION STUDY TO QOF INVESTORS :
Cost segregation is most impactful in projects involving the rehabilitation of nonresidential real property in an opportunity zone . To illustrate the potential benefits of a cost segregation study for such property , assume the following results of the cost segregation study :
OPPORTUNITYZONE . COM