Cost Segregation

Cost Segregation is the use of accelerated depreciation methods on certain assets in order to increase depreciation expense, which lowers taxable income and therefor increases cash flow. For this cost recovery system, it is procedure to classify components of property, for example a building, into different categories, and depreciate them accordingly. According to the Journal of Accountancy (journalofaccountancy.com, cost segregation begins at the time of purchase. At this time, the client who is buying property should use an engineering report to segregate assets into four categories: personal property, land improvements, buildings, and land. These different asset categories have different depreciable lives. Because of this, there are strict regulations and guidelines as to which assets are classified as which. For personal property such as furniture, carpeting, certain fixtures and windows, taxpayers can normally depreciate these assets using a five or seven year life and the double-declining method. It is important to maximize the value of this property in order to maximize tax savings. Because these can be depreciated quicker than other assets, these assets offer the most opportunity for tax savings per capita. For land improvements such as sidewalks, parking lots, fences, walls and docks, taxpayers can depreciate these assets over a 15-year life. These assets are subject to accelerated depreciation, mainly 150% declining balance. It is important to maximize the value of this property in order to maximize tax savings For buildings, again it is important to attempt to maximize the buildings value. Building get treated differently that the previous two. The building itself is depreciated at a 39-year life. However, component parts of the buildings can be segregated into appropriate classes of personal property and depreciated accordingly. Cost segregation can be used for buildings that are already in use for a while, as well as buildings