1. “Understanding Cost Segregation Studies”
Presented by:
Cathy A. Harris, CPA
Director, Cost Segregation Group
Product sheet.

2. What is a Cost Segregation Study?
A cost segregation study (CSS) is a systematic engineering-based analysis and classification of all capital expenditures associated with a newly constructed, renovated, recently purchased or existing property.

3. CSS Goal
The goal of a CSS is to identify assets as either real or personal property and to separate the capital expenditures into the most optimum MACRS asset classifications allowed by IRS code, revenue rulings and existing case law.

4. Why is a Cost Segregation Study a Good Idea?
A properly completed Cost Segregation Study will:
Maximize tax deferrals through accelerated depreciation
Increase cash flow through a decrease in tax exposure – potential for a big “catch-up”
Minimize taxable gains on the sale of property

5. What Type of Owners Benefit?
Taxpayers with a commercial property having depreciable basis of $750,000 or greater.
Taxpayers who have constructed, purchased, expanded or renovated commercial properties since 1987.
Lessees and lessors who have made leasehold improvements of $750,000 or greater.
Owners of properties about to be sold or who have sold property in recent years.

6. Primary Property Recovery Periods
Component
Building
Land Improvements
Furn, Fixt. & Equip.
FF&E, Retail & Service
Information Systems
Recovery Period
27.5 or 39 years
15 years
7 years
5 years

7. Average Value Misclassified by Property Type
Manufacturing
Hotels
Apartments
Restaurants
Office Buildings
Research & Development
Hospitals
Tenant Improvements
Retail
Grocery Stores
20% - 60%
15% - 40%
20% - 50%
10% - 40%
15% - 50%

8. Examples of Reallocated Personal Property
Carpeting
Wallcoverings
Cabinetry
Specialty lighting
Specialty electric and plumbing
Built-in shelving
Loading dock equipment

9. Examples of Reallocated Land Improvements
Asphalt
Concrete
Parking lot lighting
Curb and gutters
Signage
Landscaping

10. Benefits of a Cost Segregation Study
The present value of income tax savings, at 7% interest rate, for each $100,000 in property identified as personal property versus nonresidential real property with a 39 year life:
5 Year property - $17,200
7 Year property - $15,800
15 Year property - $9,600
* Assumes 35% Federal Income Tax Rate

11. Average NPV Savings Building Type
Ave. First Year Savings/ $1million of Depreciable Property
Avg. NPV Savings / $1million
Of Depreciable Property
Apartments $
10,000
36,000
Hotels
20,000
64,000
Office Buildings
8,000
39,000
Office Parks
7,500
35,000
High-rise Office Buildings
6,000
24,000
Shopping Centers
44,000
Flex Buildings
9,000
Office-Warehouses
7,000
34,000
Manufacturing
Auto Dealerships
11,000
51,000

12. Catch-Up Depreciation
For existing properties that are not optimally classified, the IRS provides an automatic consent procedure to make changes on a “catch-up” basis.
Depreciation differences between current and optimum property classifications are currently allowed to be fully expensed in the year of change.

13. Year of Sale Study
Catch-up depreciation taken at ordinary tax rates (up to 35% federal rate).
Additional gain on sale recognized at capital gain rates (15% federal rate).
Up to 20% tax savings on additional depreciation taken in the year of sale.

14. Recent Developments Relating to Depreciable Property
Bonus Depreciation is back for 2008 and 2009!!!
For assets contracted and placed in service between January 1, 2008 and December 31, 2009.
Enhanced Small Business Expensing
Deduct capital expenditures up to $250,000 phased out after $800,000 in additions.
Increase extended from 2008 through 2009.

15. Recent Developments Relating to Depreciable Property
5 year NOL carryback for small businesses.
Expenditures related to tangible property: Current deduction v. capital expenditure.
Improvements to restore property to former working condition or to keep property in ordinary efficient operating condition may be currently expensed.
Improvements which add to the value or prolong the useful life of the property must be capitalized.

16. IRS Cost Segregation Audit Technique Guide
This guide was developed to assist IRS agents in the examination of cost segregation studies. Latest update was December 2007.
It identifies cost segregation methodologies that the IRS believes are valid and those which require additional scrutiny.
The guide identifies the attributes of what the Service believes is a quality cost segregation study and report.

17. The Process
Based on preliminary information given, we use our extensive database and estimate the expected tax benefit.
A fixed fee proposal is offered.
A site visit is made, and the data is processed.
Client is under no obligation to pay unless they receive a net benefit from the study.
Average turn around is 30 to 60 days.

18. Steps in a Cost Segregation Study
Perform on-site property tour to collect data.
Process detailed information from property tour, site map, blueprints and specifications.
Prepare itemized list of all property components.
Compute actual or estimated acquisition and installation costs for each identified component.
Allocate indirect costs to appropriate property components.
Research applicable IRS code, regulations and case law.
Determine appropriate depreciable life for each property component.
Prepare and present final report.

19. Deliverable Cost Segregation Report Preparer Information
Project Background Information.
Cost Segregation Methodology.
Asset Classification Summary.
Federal Tax Classifications.
Federal Tax Classifications Support.
Project Related Fees and Service.
Exhibit 1 - Federal Income Tax - MACRS listing of assets and associated class lives.
Exhibit 2 – Photographs.

20. Shopping Center Example
Purchase Price $3,700,000
NPV Tax Savings $193,000

21. Hotel Example
Purchase Price $3,300,000
NPV Tax Savings $178,000

22. Apartments Example
Purchase Price $22,000,000
NPV Tax Savings $969,000

23. Example Catch-up Study
Shopping Center capitalized building at $1,517,000 between 1990 and 2005.
Reclassified $300,000 to 5 year assets.
Reclassified $249,000 to 15 year assets.
Catch-up Section 481 Adjustment through 2005 was $281,000. Adjusted on the 2006 tax return.
Savings in 2006 to owners exceeding $100,000.

24. Year of Sale Benefit Example
Purchase Price: $11,400,000
Sales Price: $25,000,000
Year of Sale Tax w/o CSS: $2,600,000
Year of Sale Tax w/ CSS: $2,300,000
Tax Savings exceeding: $330,000

25. Benefit Over Price (Return on Investment)
Property Type
ROI
Apartment
4000%
Auto Dealership
3500%
Hotel
1800%
Manufacturing
2000%
Office Building
3750%
Office Park
5000%
Retail Store
Shopping Center
2500%
Office-Warehouse
1750%
Flex Building
1250%
High Rise Building
6000%
Storage Facility

26. Why use The Cost Segregation Group?
Experience providing studies since 1998.
Billions of dollars in real estate segregated.
Engineers and CPAs perform studies.
Senior member of the ASCSP on staff.
100% IRS audit success.
Authors of CCH’s Practical Guide to Cost Segregation.

27. Contact Us Visit our website: www.costsegregationgroup.com
The Cost Segregation Group
Cathy Harris, Director
(757)