When Is It Too Late to Perform a Cost Segregation Study?
One of the most common questions I get asked: "Have I missed my opportunity to perform a cost segregation study for this year?" The good news is that in most cases, the answer is “No”, especially if the owner has filed an extension for their return. As long as a cost segregation study is completed BEFORE you file, a study can even be conducted during the subsequent calendar year!
A cost segregation study identifies building components that can be depreciated over shorter recovery periods, such as 5, 7, or 15 years, instead of the standard 27.5- or 39-year life assigned to residential and commercial buildings. Accelerating depreciation can significantly reduce taxable income and improve cash flow. However, many property owners assume that if they did not complete a study in the year they acquired, constructed, or renovated a property, the tax savings are lost forever.
Fortunately, the tax code provides a remedy.
The IRS Allows "Catch-Up" Depreciation
Property owners can generally perform a cost segregation study years after a property was placed in service and still claim the missed depreciation deductions. Rather than amending multiple prior-year tax returns, we can prepare a “Change of Accounting Method” form (IRS Form 3115) on your behalf.
This process generates what is commonly referred to as a Section 481(a) adjustment. The adjustment allows taxpayers to "catch up" on all previously missed depreciation in the current tax year. As a result, the tax benefits that should have been claimed in prior years can be deducted immediately, in the current tax year, creating a substantial one-time deduction. This effectively “catches up” the taxpayer on ALL depreciation, as if you had performed the study at the time of purchase!
How Far Back Can You Go?
There is generally no specific expiration date that prevents a taxpayer from conducting a cost segregation study on a property that has been in service for many years. Studies are routinely performed on properties acquired five, ten, or even fifteen years ago.
However, waiting too long may reduce the available benefits. For example, certain assets identified in the study may have already reached the end of their shorter depreciation lives. In addition, bonus depreciation rules have changed over time, which may affect the amount of accelerated depreciation available depending on the year the property was originally placed in service.
The sooner a study is completed, the more opportunity there is to maximize the tax savings.
The Best Time Is Usually Now
While the ideal time to perform a cost segregation study is during the year a property is placed in service, it is rarely "too late" to benefit from one. The IRS’ “catch up” provision allows taxpayers to correct prior depreciation methods and claim missed deductions, in the current tax year, without amending years of tax returns. (No one wants to do that!)
For property owners who have never completed a cost segregation study, even on properties held for many years, the potential tax savings can still be significant. I offer no cost, no obligation, reviews to determine whether a catch-up adjustment is available and whether a study makes financial sense based on the property's age, value, and future plans.
In many cases, the biggest mistake is assuming the opportunity has passed when substantial tax benefits may still be waiting to be claimed!
You Have Questions, I Have Answers!
If you are ready to find out just how much deprecation you’ve been missing out on, send me your building’s information by completing this quick online questionnaire:
With this information, I’ll produce a no cost, no obligation preliminary cost segregation estimate, showing the range of potential increased depreciation you can realize this tax year! This estimate will also include our study fee, which is tax deductible.
Cost Segregation Services (CSSI) is the nation's premier engineering-based consulting firm, specializing in tax law surrounding commercial buildings. With over 23 years of experience and more than 60,000 studies completed, we’ve maintained unmatched service standards and a perfect record: Zero IRS audits triggered. Our mission is to unlock tax solutions, maximize benefits, and increase cash flow for our clients.
