Cost segregation study services

The study

Parts of a building that are personal property or land improvements are generally recovered over shorter periods than the structure itself. A study identifies those parts, documents what each one cost, and ties the total back to what the owner paid. How the work is done depends on how the building came to its owner, because that decides what documentation exists.

New construction and renovations

New construction cost segregation is where a study can be most exact. A building that was built or substantially renovated by its owner leaves a paper record of what nearly everything cost. The contractor’s schedule of values divides the contract into trades and line items. Change orders record what was added and what was taken out. Requisitions show what was billed against each line and when. The owner’s ledger picks up everything that never passed through the general contractor: design fees, permits, utility connections, furniture and equipment bought directly. Where a bank financed the work, there is usually a complete set of monthly requisitions that the lender’s construction monitor reviewed at the time.

Highbridge Studies works through these records line by line. Actual cost is assigned to each component instead of being estimated, and indirect costs such as general conditions, the contractor’s fee, design and permitting are distributed across the work they supported. Where a schedule of values gathers several components into one line, which is common for electrical and plumbing work, the drawings and the site inspection are used to divide it, and the report states how the division was made.

Cost segregation for renovations has one further use. The study can identify the components that were removed, so that your accountant can consider how to treat what was taken out.

Acquisitions

Cost segregation for acquisitions starts from less, because a purchased building arrives with a price and no breakdown. The study starts from the closing statement and the purchase contract, takes land value from the appraisal or from another source agreed with your accountant, and then builds up the cost of the components found in the building. Drawings are used where they exist. Where they do not, quantities come from the site inspection, and unit costs come from published cost data adjusted for location and for the age of the building.

The total is then reconciled to the purchase price, so that the schedule accounts for the full depreciable basis and nothing more. It is a detailed cost analysis of what was observed and documented, and the report shows the quantities and sources behind each figure.

Look-back studies

A building placed in service in an earlier year can be studied now, which is usually called look-back cost segregation. The work is the same, prepared as of the date the building went into service, using the records from that time and an inspection of the building as it stands, with attention to what has been replaced since.

The result reaches a current return through a change in accounting method, which your accountant files on Form 3115. Whether and when to file is the accountant’s decision. The study supplies the cost detail the filing rests on, and the page for accountants describes the schedule that is delivered.

Property types

Apartment buildings are the most common subject, and there is a separate page on multifamily cost segregation. Mixed-use buildings with stores at grade and apartments above are nearly as common in this region, and they raise their own questions about who built and who owns the commercial fit-out. Hotels carry a large share of furniture, fixtures and equipment, usually bought by the owner directly and well documented. Office and retail buildings turn on tenant improvements and on which party paid for them. Warehouses and light industrial buildings tend to have plain interiors and a good deal of site work: paving, fencing, lighting, drainage and loading areas.

These are examples and not a list of what qualifies. Any building held for rental or business use can be examined the same way, provided its basis justifies the fee.

The report

The report describes the property, lists the documentation relied on, explains the method, and classifies each component with the authority for that classification. It reconciles the classified costs to the building’s total basis. It includes a photographic record and, where the site visit was recorded, references to the recording. A fixed-asset schedule accompanies it in a format your accountant can work from.

How a study is prepared follows the work from the first document to the final schedule.

What the owner sends

Whatever exists. None of the following is required, and nothing needs to be sorted or labeled first.

• Closing statement and purchase contract
• Appraisal
• Drawings and specifications
• Construction contract, schedule of values, requisitions and change orders
• The owner’s project ledger or cost report
• Permits and the certificate of occupancy
• Prior depreciation schedules, for a building already in service
• Invoices for improvements made since

Questions

Can a cost segregation study be done without construction records?

Yes. Most purchased buildings come without them. The study is then built from the closing documents, the appraisal, any drawings and the site inspection, with published cost data supplying unit costs, and the result is reconciled to the purchase price.

Does a cost segregation study require a site visit?

The preparer typically inspects the building in person, because a component that has not been seen is hard to document. The visit is recorded, so the report can point to where each item was observed.

When should a cost segregation study be done?

A study can be prepared once a building has been placed in service, or in a later year as a look-back study. For new construction, the records are easiest to gather while the project team is still in place. Your accountant can say which tax year it should apply to.