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The #1 Misunderstanding About Cost Segregation

| November 30, 2017
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Cost Segregation on Older Buildings?

Virtually all commercial property owners believe that “Cost Segregation” must be performed on newly acquired property. Yes, it is certainly true that you can do Cost Segregation on new buildings or newly renovated buildings but it is also true that Cost Segregation Studiesare beneficial for older buildings!

The first sentence in the IRS Cost Segregation Audit Techniques Guide – Chapter 6.2 reads:

“A taxpayer may conduct a cost segregation study on used property and then re-compute its depreciation deductions for prior years”. 

Not only “may” a taxpayer do this but over 75% of GMG projects are older properties. In the industry this is called the “Catch Up” method, and it can produce powerful results.

Here is an example:

Mr. Client acquired a commercial property for $3,500,000 five years ago and never completed a Cost Segregation Study.

Despite rumors to the contrary, Mr. Client recognizes he may now have an opportunity to benefit from a study. Mr. Client hires an expert (GMG for example), who identifies 20% ($700,000) of components that should have been allocated to 5-year life instead of 39 years. Mr. Client is ecstatic when he realizes the IRS will allow him to “catch up” $700,000 of missed accelerated depreciation on his next tax return!

Why doesn’t every building owner and CPA know this?

The answer is straightforward: it is not their area of expertise. Although some building owners and CPAs have substantial experience with Cost Segregation, most do not. There is a dearth of educators in this field, which unfortunately leads to the common misunderstanding that Cost Segregation can only be done on newly acquired or constructed commercial property. These factors have caused countless thousands of building owners to miss out on this powerful tax savings strategy.


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