Cost Seg Benefit Denied Due to Lack of Documentation
Building Owners Apply Methodology Themselves
The principle goal of a cost segregation study is to increase cash flow from constructed buildings, purchased properties and renovations by accelerating depreciation. However, building owners who apply cost segregation deductions on a tax return without the benefit of a proper third-party study risk losing out on this valuable tax benefit altogether.
A recent court case clarifies the necessity of proper documentation for a cost segregation study. In Ronald Pearce and Daryl Pearce v. Department of Revenue, State of Oregon, the plaintiffs filed a tax return that included accelerated deductions based on their own interpretation of cost segregation methodology.
The plaintiffs had no experience with cost segregation and were not using an outside consultant, but argued that the methodology was proper because it followed the “rule of thumb” approach based on a preparer’s “experience in a particular industry.” As noted in the IRS Audit Techniques Guide, the rule of thumb approach is risky because the results may lack sufficient documentation to support the reallocation of building components into shorter class lives.
The Oregon court ruled that the plaintiffs failed to satisfy their burden of proof with regard to the depreciated items. Because the plaintiffs had carried the deductions forward several years, multiple years’ tax returns were affected.
SourceHOV | Tax, was founded in 1983. Over the past decade, we have conducted cost segregation studies on thousands of properties nationwide. We have an in-house, dedicated team with more than 50 years’ of combined experience in cost segregation, and we have analyzed more than $5 billion in construction and acquisition costs.
SourceHOV | Tax’s cost segregation professionals are comprised of professional engineers, contractors and real estate professionals many of whom are LEED accredited. We apply best practices such as those listed below to ensure a quality study and maximized tax benefit.
- Use of engineering-based “take-offs”
- Allocation of “soft” or “indirect” costs
- Tax benefits separated by tenant spaces
- Use of “replacement cost new” and physical depreciation (wear and tear)
Cost segregation is one of the most valuable and often overlooked tax incentives available to building owners. For more information on cost segregation, please contact us at 817.732.5494.