Cost Segregation
Purpose
Separate building costs into assets with different recovery periods for proper depreciation.
ATG coreLand
Land is not depreciable; must be separated from building and improvement costs.
non‑depreciableBuilding / Structural
§1250 property depreciated over the applicable building recovery period (39‑yr / 27.5‑yr).
39‑yrPersonal Property
§1245 property — shorter recovery periods (5‑yr, 7‑yr) for certain components.
5‑yr / 7‑yrLand Improvements
Parking, sidewalks, landscaping, fencing — may qualify for 15‑yr property.
15‑yrBuilding Components
Distinguish between structural components and tangible personal property.
component analysisElectrical Systems
Individual analysis: some components are building property, others qualify as personal property.
function‑basedPlumbing Systems
Generally building property, but certain components may require special analysis.
facility‑specificHVAC Systems
Classification depends on general building use vs. specific business process.
process vs. generalLighting
Exterior lighting (parking/walkways) vs. specialized landscaping lighting — different treatment.
site‑specificFire Protection & Alarm
Generally building components; specialized systems may qualify for shorter recovery.
safety systemsSpecialized Building Systems
Systems serving specific business activities may qualify as personal property.
activity‑drivenQualified Improvement Property
Interior improvements to nonresidential buildings may get special depreciation.
QIP§1245 vs. §1250
Central issue: distinguish personal property (§1245) from real property (§1250).
classificationRecovery Periods
Assign correct MACRS recovery period based on asset class and tax law.
MACRSPlaced‑in‑Service Date
Establish when property was placed in service; depreciation depends on this date.
PISBonus Depreciation
Identify property eligible for bonus depreciation; apply applicable law.
100% bonus§179 Deduction
Qualifying property may be expensed under §179, subject to limitations.
§179§179D Energy Efficiency
Energy‑efficient commercial building property may require separate consideration.
green buildingCost Allocation
Total cost must be allocated among land, building, improvements, personal property.
reasonable basisActual Cost Documentation
Invoices, closing statements, construction plans, fixed‑asset records.
source documentsEngineering Analysis
Fact‑intensive; combines tax law and engineering principles.
engineeringConstruction Documents
Contracts, plans, specs, change orders, payment applications.
project recordsDetailed Asset Schedule
Identify individual assets/groups, costs, classification, recovery period, depreciation.
asset listingCost Estimating
When actual costs are unavailable, use reasonable estimating techniques.
estimateUnit‑in‑Place Method
Estimate costs using established unit costs applied to quantities.
unit costingResidual Estimation
Assign remaining cost to residual category after identifying known costs.
residualReplacement Cost / Trending
Use current replacement costs adjusted for appropriate factors.
trendingStatistical Sampling
Sampling may be used; IRS may involve Computer Audit Specialists.
samplingReasonableness of Allocation
IRS evaluates whether allocation is reasonable and supported by facts.
reasonablenessConsistency
Classifications should be consistent with taxpayer records and tax law.
consistentChange of Accounting Method
May require Form 3115 and accounting‑method rules.
Form 3115§481(a) Adjustment
Depreciation method change may create a §481(a) adjustment.
§481Disposition Issues
Cost segregation affects assets subject to disposition and recapture.
dispositionPartial Asset Dispositions
Determine whether retired building components should be removed from basis.
partial dispositionDocumentation of Methodology
Explain how costs were identified, classified, measured, and allocated.
methodologyTax Law Support
Support classification with statutes, regs, rulings — not just percentages.
authoritySite Inspection
Physical inspection provides evidence of nature, quantity, function.
inspectionPhotographs
Substantiate existence and characteristics of segregated assets.
photo evidenceQuality of the Report
Sufficient detail to allow examiner to understand and verify conclusions.
report qualityRisk Analysis
IRS examines tax significance vs. resources required for audit.
audit riskSpecialist Involvement
Engineering, computer audit, and other specialists may assist.
specialistsFact‑Intensive Analysis
Highly dependent on facts, property use, and supporting evidence.
fact‑drivenAudit Trail
Permit examiner to trace allocation from original cost to segregated assets.
traceableReconciliation
Segregated costs must reconcile to total depreciable basis (excl. land).
reconciliationUnsupported Percentages
Blanket percentages or rules of thumb are vulnerable to challenge.
avoid blanket %Functional Analysis
Asset function is critical to determine structural vs. personal property.
functionSpecific vs. General Use
Whether asset serves general building operation or specific business activity.
use‑basedApplicable Asset Class
Identify MACRS asset class, not just recovery period.
asset classOverall Study Quality
IRS evaluates if conclusions are technically correct, documented, and supported.
defensibleMulti-Family Apartment
50-unit complex, $18.5M basis. Reclassified 35% to 5‑yr property + bonus depreciation.
50 unitsMedical Office Building
$22M specialty medical facility. 42% reclassified to 5‑yr and 7‑yr property.
35k sq ftSelf-Storage Facility
$8.2M facility. 32% reclassified to 5‑yr and 15‑yr land improvements.
600 unitsRestaurant & Hospitality
$9.8M full-service restaurant. 38% to 5‑yr equipment + interior improvements.
250 seatsRetail Shopping Center
$26M center. 41% to 5‑yr and 15‑yr property incl. parking & site work.
120k sq ftIndustrial Warehouse
$15.2M distribution center. 36% to 5‑yr and 7‑yr property.
80k sq ftHotel & Lodging
$32.5M hotel. 44% reclassified — FF&E, MEP, interior improvements.
180 roomsClass A Office Building
$28.5M high-rise. 39% to 5‑yr and 15‑yr property incl. tenant improvements.
150k sq ftAssisted Living Facility
$18.2M facility. 37% to 5‑yr and 15‑yr property.
80 bedsAuto Dealership & Service
$16.5M facility. 40% to 5‑yr and 7‑yr property incl. lifts & equipment.
12 service bays