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The 6 Types of Cost Segregation Studies

Jun 12, 2024

     Real Estate Investors can realize significant tax saving and increased cash flow through a cost segregation study. The studies differ by the methodology, quality, costs, and also benefits and defendability in case of an audit.

     According to the IRS Cost Segregation Audit Technique Guide, there are 6 types of Cost Segregation approaches.

Source: www.irs.gov/pub/irs-pdf/p5653.pdf

     The Cost Seg America team only uses the top two approaches: Detailed Engineering Approach from Actual Cost Records (new construction & after purchase improvements) and Detailed Engineering Cost Estimate Approach (purchase of an existing building).

    This means that you benefit from uncovering each and every component of the building, including all MEP (mechanical, electrical and plumbing), finding substantially more savings than in lower tier studies. Additionally, you get robust defendability in case of an IRS audit and a good sleep at night. 

     There are four lower tier approaches mentioned by IRS that most of our competitors use:

3. Survey or Letter,
4. Residual Estimation (often used by other cost segregation providers),
5. Sampling/Modeling (often used by other cost segregation providers),
6. “Rule of Thumb.”

     These types of studies are often less labor intensive and are often called ‘engineering-based’; as a result, you may get a cheaper study which however ends up costing you more.

     First, in those lower tier studies, many straight-line assets are bundled together, thus leaving a good portion of your money on the table.  This is usually anywhere from 6% to 15% less depreciation deduction. Second, in case of the IRS audit, these lower tier studies are often not defendable and costs you more down the line - time, money, and sleep.

     Methodology matters. Reputation matters. Our team, doing Detailed Engineering studies, has been in business for 22 years and does premium work that allows you to maximize your tax savings and lets you sleep well at night. Choose quality. 

     Call us for a free evaluation today (888-865-4401), or submit your information online for a FREE PROPOSAL.

Contact us to see if COST SEGREGATION is a good fit for your business.

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