Engineered cost segregation: the ticket to dramatically accelerating the depreciation of real property

As we all know, the IRS allows the owners of income producing real estate the right to claim tax deductions for asset depreciation. Generally speaking, the building and its major components can be “written off” using a 39 year depreciation schedule. Assets located within the building structure, and certain other identifiable components such as roofing, parking lot pavement etc., will receive shorter depreciation schedules of either 5, 7 or 15 years.

What is less well known is that the IRS will allow property owners to categorize certain tangible assets as 5, 7 or 15 year property that would otherwise fall into the 39 year life schedule - provided it can be properly documented. Take for example a medical clinic that depreciates its MRI machine over 5 years. With proper documentation it can be demonstrated that all of the necessary building components dedicated to supporting that piece of equipment including wiring, electrical circuitry, etc. would also qualify as 5 year property rather than 39 year property since these building components were necessary for that piece of machinery to function.

The process by which property is re-classified is commonly known as cost segregation. It is common for most tax practitioners to do this for their clients. While this can be beneficial we have found that it does not go far enough. In order to truly maximize the depreciation benefits one must undergo a process known as engineered cost segregation. This process employs the services of skilled engineers who are specifically trained at examining a commercial building and its components to identify every opportunity to re-classify long life assets into shorter life schedules, thereby dramatically accelerating the cost recovery tax benefits and enhancing the owner’s after tax cash flow.