What is the Cost Segregation Calculator?
Cost segregation is a method for analyzing building costs to reallocate them more quickly, allowing your commercial real estate project to qualify for accelerated depreciation. People often use this technique when doing renovations on existing buildings.
The purpose of the calculator is to help you quantify all of the building costs that may qualify for cost segregation and to allow you to optimize your project more efficiently.
The cost segregation calculator has two significant functions:
- Estimating cost segregation potential – allowing you to quantify your project costs and match them up with the most beneficial assets. This will enable you to benefit from tax savings more quickly.
- Calculating accelerated depreciation – letting you run reports which identify what types of depreciation are available to the project (cost segregation or otherwise).
Where do you start?
Before running the calculator, it is helpful to have some basic information, to begin with. For cost segregation purposes, the following are essential bits of knowledge:
- Property type/use – Is your property commercial or residential?
- The original use of the building – When was the building initially constructed/placed in service?
- Year built – What year was the building initially constructed/placed in service?
- Professionals’ cost segregation studies – Have you already had cost segregation done on your project? If so, what types of costs (e.g., land, exterior lighting, furniture & fixtures, etc.) were reclassified as 5- and 7-year assets?
- Do not use the calculator as an alternative to professional cost segregation studies performed by a qualified engineering firm. Nor should you cite or rely on any of the numbers or calculations within this article to substitute for detailed and trustworthy engineering research. The purpose of this tool is to show you what’s possible and allow you to accomplish the task more efficiently.
HOW TO USE THE COST SEGREGATION CALCULATOR:
- To use the calculator, choose a property type/use (residential or commercial) and enter its original construction date. Next, select which types of costs were reclassified as 5- and 7-year assets (if you’ve had these studies performed). The GSA’s U.S. General Services Administration provides these lists to be comprehensive. However, if your project has expenses that aren’t mentioned in the list, they can still be reclassified for tax purposes as long as they fulfill the requirements of “prudent” and “arm’s length.”
- Once these initial selections have been made, the calculator will run a few reports for you to identify your cost segregation potential and accelerated depreciation opportunities. This information is invaluable for estimating how much money you can save on taxes with cost segregation. Understanding your potential tax savings will better know which projects are worth pursuing and how to go about them.
- The calculator automatically derives asset lives (classified as 5-/7-yr for accelerated depreciation) from the most recent GSA study (published in 2013). For all other costs, the lives will be set at 40 years. You can adjust these lives manually if desired, but please use reasonable values only.
- To provide a more comprehensive picture, the calculator also generates a summary of potential M&E and land reclassifications that you may want to keep track of.