Unrestored vehicles contains hidden value to the beholder, so does commercial real estate, which may offer untapped value to its owners. Some people look at an old truck and just see an old truck, while others see value and opportunity. In some ways, commercial real estate can have the same impact on business owners resigned to 39 year straight line depreciation. Many commercial property owners and their CPA’s alike may have the misconception that owning a “late model used” building, or perhaps having acquired a classic that needs some restoration work, that any accelerated depreciation tax incentives may have passed by or not apply at all.

There’s hidden value in your walls

How a Look Back Cost Segregation Study Can Help Building Owners

That’s just not the case, a “Look Back Cost Segregation Study” will identify the shorter tax life components and allow the property owner to realize the tax deductions in the current tax year if they overlooked or did not consider this option when the property was new to them.

This may be especially appealing to those building owners who built or acquired from 2005 to 2007 at a premium for their business, then weathered the storm and come out strong. Today they may face a significant federal tax bill. This “Look Back” option can essentially identify treasure (in the form or tax deductions and cash flow) hidden within the walls and ground of their property.

How Do Look Back Cost Segregation Studies Work?

The IRS permits taxpayers to utilize a cost segregation study that adjusts the depreciation method on properties placed in service as far back as January 1, 1987. We have found that many property owners and tax advisers share the misconception that once the three-year statute to amend has expired, the taxpayer can no longer make a change. Fortunately, this is not the case.

Essentially like any other cost segregation study that segregates the components to identify as 39 (or 27.5) real property and 15, 7 or 5-year personal property for the means of accelerating the depreciation, the study is based on the actual new construction costs or the acquisition price of the tax year the building went into service and/or was improved, not current market values.

With a completed study, the taxpayer is allowed to make an accounting adjustment to catch up on the previously undeclared depreciation. This look back method allows the property owner to depreciate the difference between what has already been depreciated and the accelerated adjustment of what would have been depreciated if a cost segregation study was performed when the property was put into service. The benefits of this tax strategy can be significant and can be filed without filing an amended return.

Using a Cost Segregation Expert

Engaging a cost segregation expert to work with a tax adviser allows for both parties to evaluate and determine the owner’s potential benefits of this technique. As with a study done when the building is put into service, the look back study should be fully engineered and accounted to ensure every component is identified and accurately accounted as a bullet-proof method in the event of IRS scrutiny.

Without a proper assessment of the true potential, an owner may never realize the opportunity cost of not considering a cost segregation study on an aged property.