Whether you’re an investor evaluating your real estate portfolio, or a CPA or Tax Advisor looking to grow your cost segregation practice, here are some fundamental things you need to consider when identifying cost seg opportunities.
Types of Real Estate that Benefit from Cost Segregation
The only real estate that cannot benefit from a cost seg study is owner-occupied residential property. Under current tax law, we cannot depreciation the home that we live in, so there’s no opportunity to accelerate depreciation. This is also the case for second homes that are not being rented, since business income is not being generated.
There are two main types of real estate that can utilize cost seg: “commercial” and “commercial residential” real estate.
Cost Segregation Commercial Real Estate
Commercial real estate includes the following types of properties:
- Industrial: Heavy or Light Manufacturing, Laboratories and Research Facilities, Warehouses (including Cold Storage and Self-Storage facilities)
- Commercial: Casual and Fast-Food Restaurants, Bars and Pubs, Theaters, Banks, Hospitals, Salons, Daycare Facilities, Contractor and Mixed-Use Facilities, Auto Mechanic Shops and Gas Stations
- Guest Lodging: Hotels, Bed-and-Breakfasts, Motels, Assisted Living Facilities, Short-Term Rentals, Vacation Rentals, RV Parks
- Retail: Shopping Centers and Malls, Department Stores, Specialty Retailers, Discount Stores, Supermarkets, Auto Dealerships
- Office: Medical and Dental, Veterinarian, Business, Corporate
Cost Segregation Study Residential Rental Property
Commercial residential real estate includes the following types of properties:
- Apartment: Single Structure or Multi-Building Complexes
- Multi-Unit: Duplexes, 4-Plexes, Row/Townhouses
- Single-Unit Residences (leased): Single-Family Residences, Cabins
- Condos: High-rise, Garden
Cost Segregation on New Construction versus Existing Buildings
Cost seg can be done on a building, regardless if it was newly built, or the investor purchased an existing building. Although the cost segregation study approach is similar, the supporting documentation for the cost seg study is different.
How to cost seg a newly constructed building
Whether the investor hired a general contractor (GC), or self-performed the construction of the building, actual construction costs are known. If a GC was utilized, the contract between the owner and the GC included a schedule of values that defines the cost details of the scope of work. If the owner self-performed the construction, actual costs for materials, labor and subcontractors must be used to determine the total cost of the building, once it’s placed in service.
How to cost seg an existing building
If the investor purchased an existing building, actual construction costs are generally not known. In this case, the cost seg study must rely on any available documentation, including (but not limited to):
- The Purchase Contract
- The Closing Statement
- An Appraisal, if utilized
- The Property Tax Assessor’s documentation
Property Basis That Makes Cost Segregation Worthwhile
There is no legal limitation on how big a property needs to be in order to apply cost seg strategies. However, there used to be a rule-of-thumb in the cost seg industry that segregating properties valued at less than approximately a million dollars would not be cost effective. Fortunately, in recent years, due to technology advances, this is no longer the case.
If you own a condo that you rent out that’s worth, say, $100,000, is it worth doing cost segregation on it? Well, that depends. The trick is figuring out what the benefit that a cost seg study can produce, compared to the cost of conducting the study. The best way to do that is by running a cost seg benefit estimate.
Titan Echo’s Matrix Estimator is the fastest, most reliable way to run your cost seg benefit estimates. You can get access to Echo to do that here:
With Echo, you can run Matrix estimates for all of the investment properties you own, or for any and all potential projects for your clients and prospects. This way, you can pick and choose which projects make sense to execute a cost seg study on.
When To Do a Cost Segregation Study on a Property
Many people assume that if you’re going to do a cost seg study on a property, you have to do it in the tax year that you acquired (or built) it. In other words, the assumption is that if you didn’t know about cost seg the first year, the opportunity to benefit from this tax strategy is lost. Fortunately, this is not the case.
You can do a cost seg study on a property at any time during the period that you own the building. However, at some point in the ownership period, the benefit of doing the study diminishes to the point where it’s not worth doing. This happens because with every year of ownership, the accumulated depreciation via the straight-line method reduces the amount of remaining depreciation that can be accelerated. Typically, a cost seg study is worth doing in roughly the first seven years of owning the property.
The good news is, if you do a cost seg study after the first year of ownership, the study will include the “catch-up” depreciation amount. In other words, you can catch-up on the accelerated depreciation, as if you did the study in the first year of ownership. This is another great reason to run an Echo Matrix Estimate – to determine the cost seg benefit, including the catch-up depreciation.
Using the Internet to Identify Cost Segregation Opportunities
If you want to grow your cost seg practice, leveraging the web is a smart way to identify new study opportunities. Here are five strategies to attract new cost segregation business:
1: Build a detailed web page on your website that focuses on cost segregation.
The core of your online marketing strategy should be to land at or near the top of the search results for “cost segregation”. Adding a webpage that focuses on this tax strategy will help you get found. A visitor should be able to click through to your website, and land immediately on the topic they were looking for.
2: Update your website regularly with useful cost seg content.
Regularly adding new content on cost seg will also help your search rankings. The most efficient way to do this is by creating blog posts. Although this may sound daunting, curating content that you find on the web is a good strategy for accomplishing this.
What does “regularly” mean? Well, that’s up to you. Although there are many opinions in the industry, ultimately, it’s best to adopt a schedule that’s sustainable for you, and stick to it. The frequency of your posting will also dictate how long your blogs should be. If you’re blogging once or twice a week, a 500-word post is a good target. However, if you’re blogging once a month, consider a 2000+ word post, with more in-depth details.
As for topic ideas, do some internet research of your own, to identify what the industry is searching for, and the results that are currently available to them. Also, listen to your existing clients and prospects—their questions are typically great topic ideas.
3: Include keywords and key phrases on every page.
You can find your most important keywords simply by starting your internet research with the search term “cost segregation”, or just “cost seg”. However, don’t repeat your keywords excessively—this will actually hurt your search rankings. Try using synonyms, or dive deeper in your search efforts. Also, if you want to target cost seg opportunities that are local to you, include your specific geographic area in your blog copy. Ultimately, however, your keywords should never be a priority to your writing. Use a conversational tone, and offer content that is valuable to your readers.
4: Get familiar with “technical SEO”.
Technical Search Engine Optimization (SEO) has less to do about the content of your blog posts, and more to do with how your pages are constructed. Your blogs’ page titles and descriptions are embedded in the code for your website and appear in a search engine’s results page. By including keywords in your page titles and descriptions, search engines like Google can more easily determine the content of your pages, and rank them appropriately in their search results.
In addition to strategic page titles and descriptions, other technical component considerations can also improve your search results. Some of these include:
- Crawlability: How efficient a search engine crawler can navigate your website.
- Page rendering: How fast and accurate your pages can be rendered in a web browser.
- Indexing: How well a search engine can find and store your website’s content.
- Architecture: The overall layout and organization of your website.
Typically, you should leave the technical SEO issues to your website manager. This will allow you to stay focused on executing cost segregation studies and growing your cost seg practice.
5: Leverage social media to extend your cost seg business outreach.
Because social media is an important way that people evaluate a company, you shouldn’t overlook this component of your online marketing strategy. However, to avoid diluting your efforts in social media, focus on where your target prospects spend most of their time.
These ideas are not only good for increasing your visibility on the web, but will also provide a better visitor experience once a prospect clicks through to your website. There’s no faster way to grow your cost segregation practice then through implementing a systematic online marketing strategy.
FAQs
Can I do a cost segregation study on a short-term rental property?
A short-term rental, including a vacation rental, is considered a business asset because it’s used to generate income. Therefore, cost seg would be applicable and should be considered for any short-term rental. However, this type of property is considered Guest Lodging, and should be depreciated similar to the way a hotel is depreciated.
Can I do a cost segregation study on an existing building that was purchased?
Yes. The property doesn’t need to be new construction to be eligible for a cost seg study. However, since actual construction costs are typically not available in the purchase of an existing building, relying on engineering analysis and construction cost estimating methods is even more critical.
Can I do a cost segregation study on my own home?
Unfortunately, no. Because your personal residence is not used for generating business, you’re not able to depreciate it. Therefore, cost seg would not be applicable.
What’s the best way to identify properties that would benefit from a cost segregation study?
All commercial real estate, including commercial residential properties, could potentially benefit from a cost seg study. In addition, any of these properties that have been depreciating for less than seven years (typically) would most likely be worth doing a cost seg study on. Running a Titan Echo Matrix Estimate on any of these properties would quickly determine the viability of implementing cost segregation.
