Maximize cash flow with cost segregation study.

If you're acquiring, constructing, or substantially renovating real property, a cost segregation study can improve your cash flow by supporting accelerated depreciation expenses and deferring taxes.

A cost segregation study analyzes construction or acquisition costs and identifies assets that are properly classified as personal property with shorter depreciable lives (e.g., five, seven, or 15 years). Assets classified as real property are depreciable over 27.5 or 39 years.

The higher the percentage of costs that can be allocated to personal property, the more quickly these costs can be recovered through depreciation deductions. Unfortunately, without a cost segregation study, many assets are unnecessarily classified as real property. Often, the acquirer of a building depreciates the entire purchase price over 39 years even though many items in or attached to the building would have qualified for accelerated depreciation.

Although there's no magic list of items that qualify for faster depreciation, the IRS and the courts look at a number of factors in determining whether property should be treated as part of the real estate, including:

* Is the property capable of being moved, and has it in fact been moved?

* Is the property designed or constructed to remain permanently in place?

* Are there circumstances which tend to show the expected or intended length of affixation, i.e., are there circumstances which show that the property may or will have to be moved?

* How substantial a job is removal of the property and how time-consuming is it? Is it "readily removable"?

* How much damage will the property sustain upon its removal?

* What is the manner of affixation of the property to the land?

In many cases, property that seems to be permanently affixed to the real estate may nevertheless qualify for accelerated depreciation. Items that relate more to the owner's business than to the operation or maintenance of the building may be depreciable over shorter periods.

In Hospital Corporation of America v. Commissioner, for example, the Tax Court ruled that the following items could be treated as personal property for depreciation purposes: primary and secondary electrical distribution systems, television wiring, telephone equipment, carpeting, vinyl wall and floor coverings, kitchen plumbing connections and exhaust hoods, patient corridor handrails, and accordion-style room dividers. The court reasoned that these items were either related to the business of furnishing medical services or were not related to operation or maintenance of the building.

The most effective way of achieving these tax benefits is to track and document actual costs during construction or at the time of acquisition. But it's also possible to enjoy tax savings by performing a cost segregation study on a previously acquired or constructed facility.

For more information on cost segregation studies or any other accounting and consulting needs, please contact Gerald Marsden at Eisner & Lubin LLP. Eisner & Lubin LLP is recognized as one of the leading accounting and consulting firms serving the Real Estate industry. Phone: [phone]. Fax: [phone]. www.eisnerlubin.com.