For real estate investors looking to increase cashflow, or CPAs interested in offering strategic tax services to their real estate clients, cost segregation is an appealing strategy. For many investors and CPAs getting into cost segregation, a common question is asked: “Can I do this myself?” The answer to that isn’t just yes or no, it’s a little more complicated than that. If you are looking to perform a Cost Segregation Study (CSS) yourself, you need to know what that entails.
Cost Seg Study Requirements
Before embarking on a CSS, you should have a solid understanding of what cost seg is, what it requires, and what your options are.
IRS Audit Technique Guide
The IRS maintains and updates the “Audit Technique Guidelines” (ATG) which lays out how the IRS would review your CSS, should you be selected for audit. Before you embark on your own CSS, you should become familiar with the ATG’s expectations. You can find it on the IRS website by searching “cost segregation audit technique guide”. The ATG identifies the 13 Principal Elements of a Quality Cost Segregation Study. Although there is no specific one way to perform a CSS, ensuring the inclusion of these elements increases the probability that your CSS will be defensible, if reviewed.
Full-Blown Cost Seg Study
Following the ATG’s guidance, the best way to maximize your benefit and defensibility is to perform a full-blown CSS. As the ATG explains, executing a quality CSS can be difficult and tedious. However, with Titan Echo’s technology and support, you can do part of this yourself, and lean on Titan Engineering to do the hard parts.
EchoLite
However, the reality is, conducting a full-blown CSS can be cost prohibitive for smaller projects. To address this, Titan offers “EchoLite” for properties with lower cost bases. EchoLite is a simpler cost segregation solution that significantly reduces the cost of capturing a cost seg benefit.
While you do have two approaches to conducting DIY Cost Seg, they each have their own pros and cons. Let’s break them both down for more details.
How to Run a Full-Blown Cost Segregation Study
If you read the IRS Audit Techniques Guide, you’ll see that completing a cost segregation study entirely on your own is unfeasible. However, you can perform parts of one on your own, leveraging Titan Echo’s technology. First, it’s important to know the three Components of Scope involved in a CSS.
The Components of Scope
A Cost Segregation Study is performed in three Components of Scope. Titan Echo leverages our technology to streamline all three Components, with industry-leading software and engineering support that ensures every aspect of your cost segregation study is completed efficiently, accurately and cost-effectively.
- On-Site Verification (OSV): The IRS expects you to verify that your assets exist, in the field.
- Construction Cost Estimating (CCE): Titan’s engineering team will analyze the data collected from the OSV, to identify and assess each component of the property and its related cost.
- Legal Analysis (LA): The final Component of Scope is about evaluating each Item under the current cost seg body of law to determine which Items in the project can be reclassified as personal property.
To put it more simply, you can perform your own cost seg study – at least the easy part, which is typically the most expensive part to outsource. To learn more about these three components of scope, check out “What is Cost Seg?”
Your Role: The OSV
When you pull the trigger on a DIY Cost Seg Study, your job is to do the On-Site Verification. To do this efficiently, you’ll need to get access to the Echo mobile app – available on the App Store and Google Play.
Once you have the Echo mobile app, it’s time to gear up for the field. Executing field work needs to be done systematically, or you’ll miss certain things. The Echo Learning Academy walks you through this process to ensure this doesn’t happen, and the Echo mobile app makes it a breeze. Ultimately, your field work is laid out to be completed in three Sections.
- Site Improvements
- Structure
- Interior
You can complete the three Sections in any order you wish, but you need to complete all of them to hand off your OSV work for the engineering.
Titan's Role
Once you have finished your field work, it’s time to reconnect with Titan to handle the engineering side of your CSS. Essentially, Titan will complete the CCE, as it is nearly impossible to do efficiently without the proper engineering and construction cost estimating expertise.
If you’re a CPA looking to do your own Legal Analysis, that option is available to you. Otherwise, Titan will handle the LA as well. In the process of completing a CSS, a thorough and defensible final report will wrap everything up neatly.
The Echo Solution allows you to confidently run your own cost seg project while being compliant with the top-tier expectations of the ATG. Although it isn’t feasible to run a full-blown CSS entirely on your own, the Echo Learning Academy allows you to get your hands on a meaningful part of the process.
EchoLite
Titan Echo’s CSS methodology is the best way to capture your cost seg benefit. However, completing the three Components of Scope costs time and money. For smaller properties, this can become cost-prohibitive. That’s why we built EchoLite®.
Leveraging Echo’s Extensive CSS Database
The EchoLite software uses valid statistical sampling in lieu of the engineering approach of a Cost Seg Study. This sampling is possible as a result of thousands of data points from Echo’s extensive database of CSS projects which provide its empirical model with the ability to accurately predict your benefit.
To run an EchoLite calc, you will input property-specific information we call Meta Data and Echo will analyze your data against our CSS database. The result is an accurate model of your cost seg benefit, without spending the time and money on the three Components of Scope.
Qualifying Criteria
EchoLite is not an appropriate approach to cost seg for all properties. In fact, the larger the property, the less accurate the empirical model becomes. Therefore, Echo limits the use of the EchoLite modeling tool unless it meets these three criteria:
Carving Out the Land
When you first set up the project in Echo, you’ll have to carve out the cost of the land from the property’s purchase price, within the Echo interface. Since the land doesn’t depreciate, we need to set its value aside before Echo can run the EchoLite empirical model.
Cost Basis
After you’ve carved out the cost of the land, the remaining cost basis of the building must be less than $500,000. If the building’s basis is $500k or more, ELS will not be an option in the Echo software. However, you can still run a full-blown CSS to execute a DIY cost seg approach on the Echo platform.
Sub-Assets
“Sub-Assets” are improvements to the property after the purchase (or original construction). Because the EchoLite empirical model cannot predict the relationship between the original building and its improvement assets, adding a Sub-Asset into the Titan Echo interface will preclude EchoLite as an option for you.
If you have Sub-Assets, but still want to run an EchoLite calc on the building itself, just don’t include them when you’re setting up your project in Echo. However, if your Sub-Assets’ bases are significant, you should take another look at CSS. With EchoLite, you’ll be missing out on not only accelerating the depreciation of your Sub-Assets, but also the Partial Asset Disposition benefit of a CSS.
DIY Cost Seg
The smaller scale of the EchoLite cost seg approach provides a pure “do-it-yourself” solution. Stripping away much of the tedious aspects of full-blown CSS, EchoLite’s fully automated software platform allows you to complete the calculation yourself. In addition, the Meta Data that you need to collect and input into Echo should all be accessible to you without having to go to the property. If you want to learn more about this, check out the Echo Learning Academy.
It’s important to note that the EchoLite calculation is not a substitute for a full-blown Cost Segregation Study, because by itself, it doesn’t meet all the requirements in the IRS Cost Segregation ATG. However, if your project meets the EchoLite requirements, this is a very efficient and cost-effective way to calculate and capture your cost seg accelerated depreciation benefit. Ultimately, for smaller properties, EchoLite provides the ideal DIY cost segregation solution.
Takeaway
You can absolutely run your own cost seg projects. If your property qualifies for EchoLite, Echo’s empirical modeling approach offers a streamlined, completely DIY path to accelerated depreciation.
If your property doesn’t qualify for EchoLite, or if you just want to execute your own full-blown CSS regardless, you can do so with the Echo platform, and eliminate the cost of outsourcing the OSV effort. By focusing on the On-Site Verification (OSV) and leveraging the Echo mobile app, you can save both time and money while still reaping the benefits of cost segregation.
Ultimately, whether you’re going fully DIY with EchoLite, or just looking to get your hands on part of a full-blown CSS, understanding your role and using the right approach ensures a smarter, more efficient and defensible method to accelerating your property’s depreciation deductions. Either way, with Titan Echo, “do-it-yourself” doesn’t mean “do it alone.”
FAQs
Here are some frequently asked questions about DIY Cost Segregation.
How much does a cost seg study cost?
Cost Segregation pricing depends on whether you are conducting a full-blown CSS, which varies based on the building’s cost basis and the Components of Scope, or if you qualify for the more affordable EchoLite®, which is a one-time flat fee. To pin down actual pricing, run a Matrix estimate and define your approach before you decide to move forward.
Does DIY cost segregation work?
Yes. Whether you run a full-blown Cost Seg Study, or leverage EchoLite’s empirical modeling approach, you can run your own cost seg projects with the help of Titan Echo.
Is DIY cost seg worth it?
Yes. With Titan Echo, you can do a cost seg project yourself, and lean on Titan Engineering for the Components you can’t do, to save significant costs compared to outsourcing the whole project.
How to start a DIY cost seg?
To start a DIY cost seg project, you’ll need front-end access to the Echo platform. Check out Titan Echo’s ‘Get Started’ page for more information.
Where to find DIY cost seg?
Titan Echo, the leading DIY cost segregation software in the nation, provides an engineering-backed cost seg solution, and gives you options on how to execute your cost seg project. Through Titan, you can play a part in a full-blown Cost Segregation Study, or, if you qualify, complete a total DIY cost seg project through Titan’s EchoLite.
