Benefits of Cost Segregation

If you are not familiar with Cost Segregation, it is a methodology that allows an owner or lessee of commercial real estate (held for profit) to use a legal alternative to straight line depreciation. There are many benefits of cost segregation. A Cost Segregation Study (CSS) is based on a detailed breakdown of construction plans that are used to support accelerated depreciation deductions allowed by the IRS. This is accomplished by identifying items in the plans (and their associated costs) that can be allocated and categorized into shorter recovery periods. The items are categorized into 5,7 and 15 year periods rather then 27.5 years for residential property and a 39 year depreciation schedule for commercial.

To understand the benefits of cost segregation, you must begin with a cost segregation study. A properly prepared Cost Segregation Study accelerates deductions in the early years of ownership or leasing. It will also provide the documentation and back up needed to allow the deferral of taxation, and greatly improve cash flow.The study requires the breakdown of property piece by piece, by using blueprints and as-built drawings. Building systems, subsystems and components are further dissected to unit cost levels. The data created by the study is then used going forward to allow the owner and their CPA to make accurate decisions required by the 2014 tax code changes, to determine if a repair or maintenance item can be expensed in the current year or capitalized over time.

Part of the 2014 Tax code change allows for the write off of the non depreciated value of building components disposed of and replaced during a renovation. A “Certified” study provides the necessary data to allow these write-offs to be calculated and taken. These services are allowed by the IRS to be used for all types of commercial real estate including new construction, older buildings, a building that has just been purchased or one that has been purchased several years ago. In a “look Back” study, data is taken from the acquisition date by the current owner, and the depreciation schedule is recreated using the methodology described above, which allows the client the opportunity to “catch-up” on lost depreciation.

Many investors have cost segregation numbers run prior to acquisition of the property during pro forma, so they are better able to determine true cash flow prior to closing escrow. There should always be a no-cost preliminary analysis done prior to engaging in a CSS. This allows the perspective client to estimate the benefit vs cost prior to investment. The benefits of cost segregation are well worth investigating.

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Mr. Grushkin is the Regional Director of Cost Segregation Initiatives (CSI). He brings forty plus years of executive experience to the CSI organization. Over the last twelve years Joel has directed cost segregation studies for developers, investors and owner/users of real estate that cover the gamut of property types and vertical markets. Property types include million dollar owner user office condominiums to $500,000,000 Senior Living Facilities, fast food franchise locations, hotels, high-end restaurants, manufacturing facilities, medical office buildings, shopping centers, multi-family housing, and auto dealerships, to name a few. For the last six years, Joel has also been an instructor of continuing education courses for two organizations providing CE to CPA’s, CFP’s, and financial advisors on a national basis.

His background includes founding and chairing the private equity, venture capital and real estate practice groups of DHR International, the 5th largest executive search firm in the United States, eleven years with Arthur Young & Company (now Ernst & Young) as a Principal and director of the firm’s Management Consulting Practice. He was also a member of AY’s Real Estate Industry Specialty Practice Group. Joel was also Chief Operating Officer of Edward Carpenter & Associates, a group of five consulting companies specializing in the start-up and on-going consultation to financial institutions in the areas of economic feasibility, capital formation, governance, mergers and acquisitions, business & regulatory affairs, and real estate. Joel has also held positions of CEO, COO, and Vice President Corporate Development at in conglomerates with holdings in real estate development, home building, financial services, mortgage banking, retail/entertainment, and automotive industries.

Joel has been a guest lecturer at San Diego State University, University of California-Berkeley, Orange County Corporate Directors Forum, and the San Diego Venture Group. He is a past member of the Board of Directors of DHR International, the San Diego Venture Group, and Compliance Coach, sold to FIS. He is currently on the Advisory Board’s of Soteria Intelligence, and Aerovu Technologies.