How a cost segregation study is prepared

Documentation

The work begins with your records, in whatever form they arrive: closing documents, the appraisal, drawings, the construction contract with its schedule of values, requisitions and change orders, the owner’s ledger, permits and invoices. Software built for this work sorts, reads and cross-references every page, so that nothing is skimmed and every figure can later be traced to the page it came from.

Public records fill some of the gaps. In New York City, Department of Buildings filings and certificates of occupancy help to date alterations. In New Jersey, municipal construction permits do the same. By the end of this stage it is clear what the records establish and what will have to be established at the building.

The site visit

The preparer typically visits the building in person and records the visit on video, describing what is seen as it is seen. The route usually runs from the roof to the cellar: mechanical and meter rooms, common areas, amenity spaces, a representative selection of units, any commercial space, and the site outside the walls, including paving, lighting, fencing and landscaping. Equipment nameplates and finishes are photographed.

The recording is continuous and time-stamped, and it is indexed afterward along with the photographs. An observation in the report can be traced to the moment it was made instead of being reconstructed from notes. Occupied spaces are entered only as the owner arranges.

Classification

Each component is then assigned to a class of property. The question in every case is whether the item is part of the building’s structure, a land improvement or personal property, and the answer depends on what the item is, how it is attached and what it serves.

The preparer works from the IRS Cost Segregation Audit Techniques Guide, the regulations, revenue rulings and procedures, and the court decisions that established the tests. Each classification in the report carries its citation. Items that could reasonably fall either way are identified as such, with the reasoning, so that your accountant can take a position with full information.

Reconciliation

Every dollar of the building’s depreciable basis has to land somewhere. The classified costs, the indirect costs allocated across them and the remaining structure are added up and tied to the total from the closing statement or the project ledger. Land is excluded on the basis of the appraisal or another source agreed with your accountant. A study that does not reconcile is not finished.

The report

The report describes the property and the documentation relied on, explains the method, and presents each classification with its cost, its authority and a reference to where the component was observed. A photographic record is included.

With it comes a fixed-asset schedule, delivered as a spreadsheet arranged the way your accountant works. The page for accountants describes the schedule, and the services page describes how the approach differs for new construction, renovations and acquisitions.

The guide

The Cost Segregation Audit Techniques Guide is published by the Internal Revenue Service for its own examiners. It describes what the Service looks for in a study and in the qualifications of a preparer. It is not law, and the Service does not approve or endorse studies or preparers. Highbridge Studies treats the guide as the standard its work is prepared to.

Scope and limits

A cost segregation study is a detailed cost analysis prepared for one purpose: to support the depreciation reported on an income tax return. It is delivered to the owner and the owner’s accountant for that use, and it should not be relied on for any other. The study assigns a cost and a depreciation class to each asset. How those figures are used, including first-year depreciation, state treatment and the effect on tax, is for the taxpayer’s accountant to decide.

Highbridge Studies does not provide tax, legal or accounting advice, and it does not prepare or file returns. How any item is reported, and responsibility for the return itself, rest with the taxpayer and the taxpayer’s own advisers. Each classification reflects the preparer’s reading of the Internal Revenue Code, the regulations, IRS guidance and court decisions as they stand on the date of the report. Those authorities change and can be read differently, and no assurance is given that the Internal Revenue Service, a state taxing authority or a court will agree with any classification.

A study relies on the records and information the owner provides and on what can be observed at the site visit. Highbridge Studies does not independently verify that information and is not responsible for errors or omissions in it.

A study is not an appraisal or an opinion of value, not a property condition assessment, and not an engineering, architectural, environmental or land survey report. It does not address code compliance, structural soundness or hazardous materials.

Studies are prepared only under a signed engagement letter, which sets the scope of work, the fee and the terms that apply. Nothing on this website changes that letter or creates an engagement.