Cost segregation can be a highly effective tool when used correctly with redevelopment and renovation projects. In addition to accelerating depreciation on the existing structure and eventually the new improvements, a cost segregation study can be used to identify the value of materials that are being retired (thrown away), so that the remaining balance can be fully depreciated in the current tax year.

Although the tax code does not allow an owner to deduct expenses for “demolition” of a building or any loss sustained due to the demolition, “renovations” may be subject to a different set of rules. These rules are very specific and it is important to know the difference between the two. It should be noted that intent is critically important when determining whether deductions are allowable or not.

Additionally, the IRS does not allow a taxpayer to write-off arbitrary amounts based on cost per square foot, or other internally developed methods. Therefore, if you are planning to renovate an existing property and have not had a detailed cost segregation study performed you may be overlooking significant tax benefits. It is important that a cost segregation study be completed before renovations begin in order to properly identify and document what was at the property. It is not acceptable to go in after the fact and analyze a pile of rubble.


Benefits

• Accelerate depreciation on existing property and new improvements
 
• Focus on tax-centric design for the new construction portion of the project
 
• Determine whether demolition or renovation rules apply
 
• Establish a detailed list of assets to support write-off or retired assets


Timing

• 1st cost segregation study before any renovation or redevelopment begins
 
• 2nd cost segregation study can be done once new improvements are complete