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Unmasking Misconceptions About Cost Segregation

Cost segregation studies are a powerful tax planning strategy that can lead to tax savings for property owners. However, several common misconceptions persist despite their benefits, causing many to miss out on the potential advantages.

Let’s debunk these myths, helping you make informed decisions and maximize the benefits of cost segregation.

Myth 1: Cost Segregation Studies Create Additional Depreciation

A prevalent misunderstanding is that cost segregation studies generate new or additional depreciation deductions. This is not accurate. Cost segregation studies allow assets to be depreciated over shorter periods by identifying and categorizing various property components into different asset classes with distinct depreciable lives. While they don’t create new deductions, they accelerate existing ones, leading to significant tax savings for property owners.

Fact Check:

Cost segregation reclassifies assets, enabling accelerated depreciation. It’s about timing, not creating new deductions.

Myth 2: Tax Savings Mean Zero Taxes Owed

Another common fallacy is that the tax savings from cost segregation studies will eliminate all tax liabilities. This is not the case. Factors like passive activity limitations still apply, affecting the extent to additional deductions can be utilized. For instance, taxpayers with both active and passive income face limitations on the deductions they can claim through a cost segregation study.

Fact Check:

Cost segregation reduces tax liabilities but doesn’t necessarily eliminate them. Passive activity limitations and other factors still play a role.

Myth 3: Cost Segregation Only Benefits Recently Acquired Properties

There’s a misconception that cost segregation only benefits newly acquired or constructed properties. These studies can be conducted on properties placed into service as far back as 1987. Even long-held properties can benefit by identifying improperly classified assets and making an Accounting Method Change to reduce tax liability.

Fact Check:

Cost segregation can benefit properties owned for decades. It’s not limited to new acquisitions.

Myth 4: Valuations Can Be Arbitrary

Some believe that the valuations in cost segregation studies can be based on arbitrary numbers or a ‘Rule of Thumb’ approach. This is a dangerous misconception. The valuations must be supported by robust engineering reports and data. Attempting to do it yourself or relying on unsupported valuations can significantly increase audit risk.

Fact Check:

Valuations must be defensible and backed by detailed engineering reports. Proper documentation is crucial.

Proper Documentation Includes:
  • New construction cost information
  • Purchase price allocations
  • Site visit documentation
  • Leasing agreements
  • Appraisals

Conclusion: Trust the Experts

Navigating the complexities of cost segregation requires expertise. By debunking these myths, property owners can better appreciate the true value of cost segregation studies. Partnering with experienced tax professionals and certified cost segregation specialists ensures that the studies are both accurate and beneficial.

Connect with National Tax Group today to explore how cost segregation can work for you. Our team of experts is ready to help you maximize your tax savings and ensure compliance with all relevant standards. Don’t let misconceptions hold you back—unlock the full potential of cost segregation with confidence.