Cost Segregation can be a very complicated subject, and because of this, people often get fed the wrong information. Misconceptions can be very misleading, so it is important to know what’s real. Here are some of the most common misconceptions that we will clear the air on:
Cost Segregation is only for more expensive, larger commercial buildings.
Actually, cost segregation can be done on all sorts of investment properties, both commercial and residential rentals. Furthermore, cost seg is not only available for higher-end, more expensive properties. With Titan Echo, you can run a cost seg study on a property with a depreciable basis as low as $150,000.
You can't perform a cost segregation study after your first year of owning a property.
Not true. You can perform a cost segregation study on your investment property at any point – you can even backtrack to capture accelerated depreciation for the years you missed out on since the first year. To backtrack, however, you must file a Form 3115 Change in Accounting Method. The Titan Echo final report includes the completed Form 3115 as part of your study.
Cost segregation increases the chance of an audit.
Although the IRS can audit your tax return for any reason, there is no mechanism today for the IRS to choose your return just because you did a cost seg study. However, if you are chosen for audit, you’ll want to make sure that your segregated property has the appropriate backup to withstand the scrutiny.
Only CPAs and tax attorneys can perform a cost seg study.
While CPAs and tax attorneys often handle cost segregation studies, real estate investors can absolutely perform a study themselves—with a little help from Titan Echo. If you want to preform your own cost seg study, you do need solid expertise in engineering and construction cost estimating. That’s the critical foundation for accurately identifying and allocating building components for accelerated depreciation.
You can’t do cost segregation if you’re in the process of selling your property.
Although you can do cost seg if you’re planning to sell, generally, it wouldn’t make sense mathematically. If you only plan to hold on to a property for less than 24 months, the benefits may not cover the cost of performing a cost seg. The longer you hold on to a property, the more beneficial cost seg becomes.
Cost segregation is reserved for new construction projects.
Although new construction projects naturally have more data (like construction drawings and actual cost details), Titan Echo’s cost segregation strategy applies the same methodologies for both new and existing buildings.
Given these misconceptions that can wrongly portray cost seg, it’s important to know the facts. These clarifications will give you a better understanding of cost segregation and what to expect when undertaking a cost segregation study.
