For property owners looking to save on taxes, a cost segregation study can be a game-changer. By accelerating the depreciation on certain assets, you can lower your taxable income and boost cash flow. But with tax savings on the line, you might be wondering: Can I do a cost segregation study myself? Let’s dive into the complexities of cost segregation and why most property owners choose to work with professionals.
What is a Cost Segregation Study?
A cost segregation study is a process that involves analyzing your property in detail to separate (or “segregate”) components that can be depreciated over a shorter period of time. For instance, instead of depreciating an entire building over 27.5 or 39 years, certain assets—like lighting, flooring, and fixtures—can be reclassified for accelerated depreciation over 5, 7, or 15 years.
The result? Substantial tax savings, as you can claim higher deductions in the early years of ownership. However, to make the most of a cost segregation study, it’s critical that each asset is accurately classified according to IRS guidelines. That’s where the complexities begin.
Why You Shouldn’t Do a Cost Segregation Study on Your Own
While it may be tempting to handle a cost segregation study yourself, the process involves several layers of expertise and technical precision. Here’s why most property owners choose to leave it to the professionals:
- Specialized Knowledge Required A cost segregation study requires an understanding of the tax code, construction costs, and engineering principles. The IRS expects a study to be conducted with meticulous detail, which usually involves an in-depth analysis of architectural blueprints, site visits, and knowledge of tax laws. Most property owners don’t have the engineering and tax expertise to conduct a study to IRS standards, making it difficult to achieve the same level of accuracy as a professional team.
- Complex IRS Guidelines The IRS has specific rules for cost segregation, including which assets qualify for accelerated depreciation and how they should be categorized. An improperly conducted study could lead to missed deductions or, worse, a red flag for an IRS audit. Professional providers have extensive experience interpreting IRS guidelines and can ensure that every aspect of the study complies with the rules, minimizing audit risk.
- Comprehensive Documentation is Required A well-done cost segregation study includes detailed documentation of every asset reclassified, complete with depreciation schedules and supporting information. This level of documentation is crucial for substantiating your deductions in the event of an audit. Without comprehensive records, you risk deductions being disallowed. Professionals know exactly what the IRS expects in terms of documentation, ensuring that your deductions are fully supported.
- Audit Support If the IRS does question your deductions, you’ll need to have a solid cost segregation report that can stand up to scrutiny. Most reputable cost segregation firms offer audit support, meaning they will help defend their study if the IRS asks for verification. Handling this on your own can be daunting and time-consuming, whereas a professional firm, like USTAGI, will be prepared to step in and provide all necessary documentation and explanations.
What Do Professionals Bring to the Table?
Professional cost segregation firms, like USTAGI, typically have teams of tax experts, engineers, and accountants working together to perform detailed studies that maximize your tax savings while maintaining full IRS compliance. Here’s what they bring to the process:
- Expertise in Tax Law and Depreciation Schedules: Professionals understand the IRS rules and can confidently classify each asset.
- Accurate Valuation of Assets: Experienced teams know how to assign values to each asset, ensuring you get the maximum benefit without crossing IRS guidelines.
- Thorough, Defensible Documentation: A professional report includes a full breakdown of the reclassified assets, depreciation timelines, and detailed supporting documentation.
- Peace of Mind: With a professional study, you can be confident that your deductions are accurate and that you have audit support if the IRS has any questions.
The Risks of a DIY Cost Segregation Study
While the appeal of DIY might seem cost-effective at first, an incorrect study can lead to costly mistakes, missed savings, and potential IRS issues. Failing to follow IRS guidelines or provide sufficient documentation could result in disallowed deductions, missed tax-saving opportunities, or even penalties in extreme cases.
Without the expertise and resources of a professional team, it’s easy to overlook qualifying assets or misclassify them, resulting in a study that doesn’t deliver the same level of savings or protection as a professional one would.
The Bottom Line: Leave Cost Segregation to the Pros
While it’s technically possible to attempt a cost segregation study on your own, the complexities and risks involved mean it’s usually not worth it. A professional cost segregation provider, like USTAGI, has the expertise, resources, and documentation standards to ensure that your study is accurate, compliant, and fully defensible. By working with experts, you can maximize your tax savings and have peace of mind knowing your deductions are secure.
Interested in learning more? Contact USTAGI today to discuss how a professional cost segregation study can benefit your property and help you achieve significant tax savings.
