We recently caught up with GRS | Centaur’s Cost Segregation guru, Don McDougall, and asked if he could give a very basic overview of Cost Segregation and how it could benefit a CRE property owner.
What is Cost Segregation?
When you buy a property, you need to allocate the purchase price between the land and the building. That’s because the building depreciates off of your books, and the land does not. As a next step, you can break your building down even further.
A building can be separated into “real” and “personal” property components. The Real Property is the roof, walls and foundation. The Personal Property includes the tenant improvements, the ground, the flooring, and other components. Real Property has a life of 39.5 years (less if it is residential), however, the Personal Property has a life of basically five or 15 years.
What a Cost Segregation Study does is take a building and separate all of its building parts into the right groups based on their accounting lives.
How does this provide an advantage?
While the total amount of depreciation remains exactly the same, the effect is to “front load” the depreciation into the first few years you own the building. For a $3 million apartment building the Net Present Value of the accelerated depreciation is worth about $90,000 after tax. Think about it this way: Do you want most of your money back in the first five years of owning a building or over the full life of the building? The Present Value of that money for this project is worth $90,000.
What does it cost?
Every project is different, but the fee for the project mentioned above was less than $7,000.
How do I make use of Cost Segregation?
Just call your local GRS Group representative, and they will help you get started. The process is simple and painless.
If you have questions I can be contacted directly at [email protected]