Asset Management & Valuation Professionals
The legislation and procedures used in an engineering-based cost segregation study have been in existence since the enactment of the Investment Tax Credit (ITC) in 1962. When the act was repealed in 1986, many assumed that cost segregation studies provided no further benefit under the new tax law. However, in a landmark 1997 tax court case, Hospital Corporation of America successfully defended the application of engineering-based cost segregation as a viable method to differentiate real and personal property under existing tax law. This landmark case continues to be the cornerstone of cost segregation studies today
While most accounting professionals have a rudimentary understanding of the 5, 7 and 15-year property classifications, few have a detailed understanding of this highly specialized niche. Most accountants are aware of cost segregation as an option to increase depreciation and reduce current federal taxes, but believe it is very expensive and is financially feasible only for large properties. The execution rate for cost segregation is under 10% because of limited knowledge by many property owners and accountants. In addition, there are misconceptions regarding the cost of obtaining these studies and the size properties for which cost segregation studies are financially feasible. As awareness of the practice increases among real estate investors and accountants, the implementation rate is rapidly increasing.
In the past several years, a number of rulings have been issued by the government to spur economic growth. These can have a major impact for building owners with previous construction or acquired properties.