Few owners taking advantage of cost segregation studies.Much has been written about "cost segregation" studies for recently constructed or renovated building. Strangely, given the amount of industry buzz about them, few developers and property owners have taken advantage of the study's potential benefits. This is because many are not clear on what a cost segregation study Under United States tax laws and accounting rules, cost segregation is the process of identifying personal property assets that are grouped with real property assets, and separating out personal assets for tax reporting purposes. actually is. They don't know Don't know (DK, DKed) "Don't know the trade." A Street expression used whenever one party lacks knowledge of a trade or receives conflicting instructions from the other party. who is qualified to perform one, and how or where to get one done. A cost segregation study recently completed by Rubin & Katz LLP LLP - Lower Layer Protocol , a real estate accounting and consulting firm, for a New York City New York City: see New York, city. New York City City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. hotel makes an excellent case study of the benefits of these studies. Simply put, a cost segregation study is the thorough segregation of building components into "real property" and "personal property." When computing a project's depreciable depreciable Of, relating to, or being a long-term tangible asset that is subject to depreciation. basis, owners often overlook the components of their real estate projects that qualify as tangible personal property. They mistakenly capitalize these costs into the project basis and depreciate depreciate v. in accounting, to reduce the value of an asset each year theoretically on the basis that the assets (such as equipment, vehicles or structures) will eventually become obsolete, worn out and of little value. (See: depreciation) them over 39 years instead of allocating them to their true asset class lives and depreciating de·pre·ci·ate v. de·pre·ci·at·ed, de·pre·ci·at·ing, de·pre·ci·ates v.tr. 1. To lessen the price or value of. 2. To think or speak of as being of little worth; belittle. them over 5, 7, or 15 years. Taxpayers immediately realize the benefits of a cost segregation study. The reclassification Reclassification The process of changing the class of mutual funds once certain requirements have been met. These requirements are generally placed on load mutual funds. Reclassification is not considered to be a taxable event. of project costs to a shorter class life results in acceleration of depreciation expense, thereby reducing the investors' taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. during the early years of the project and improving after-tax cash flow. Hotel projects benefit greatly from cost segregation studies because of the nature of their business. The large "Furniture, Fixtures, and Equipment" (FF&E) costs are readily identifiable because they are broken out in separate line items on the budget. Most developers understand that FF&E constitutes personal property that is not depreciated Depreciated may refer to:
In the case of the hotel project, this additional personal property was captured by a cost segregation study performed by Rubin & Katz LLP, which has a unique approach. Unlike other accounting firms, team members with architectural design and construction expertise are in-house. They work with the firm's tax specialists to identified personal property utilizing the latest in cost segregation case law and rulings. The cost segregation team also consists of accounting professionals who carefully track the costs of the segregated components. This integrated team method yields a successful and thorough cost segregation study. For a hotel of this scope and budget, one can assume that a traditional cost segregation would classify approximately 9% of project costs as personal property. This number consists primarily of the previously mentioned FF&E budget The Rubin & Katz LLP multi-discipline approach to cost segregation doubled the FF&E costs in the personal property classifications. This reclassification included previously overlooked equipment, fixtures, and decorative features. The final results of the cost segregation study were impressive. The hotel developer's first full tax year depreciation expense was increased by more than 31% over the "pre-segregation" estimate. This difference netted a tax savings of $1.4 million (assuming a combined federal, state, and city tax of 50%). This savings significantly frees up the project's cash flow and directly benefits the individual investor's bottom line while the project is stabilizing. Over the life of the project, Rubin & Katz LLP estimates the net present value of the tax savings to be in excess of $2 million. Hotels are not the only property types that benefit from these studies. Commercial, retail, and residential properties will also have their bottom line improved by a professional and thorough cost segregation study. |
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