Cost Segregation Specialist is a designation for a cost segregation firm or an individual cost segregation consultant. To understand the function of a Cost Segregation Specialist, it is essential to grasp the meaning of cost segregation. 

Cost segregation is the act of allocating or crediting allocated assets towards tax attributes. There are mainly two types of assets in real estate, “personal property” and “real property.” 

Personal property is typically office furniture, fixtures, and equipment (FF&E). 

Real property includes land and improvements such as roofs, driveways, swimming pools, and paved parking areas. 

Under the IRC (Internal Revenue Code), building components are usually depreciated over 39 years using the Straight-Line method (the 200% declining balance method has been recently eliminated; bonus depreciation is now available). However, Cost Segregation studies reallocate or “segregate” specific building components into shorter recovery periods. And if a building component is depreciated over a shorter recovery period, the remaining balance of the cost of that asset will be written off more quickly. For example, roofing placed on an office may be depreciated over five years instead of 39 years. This means depreciation deductions can be accelerated and ordinary income taxes paid less frequently. 

Cost Segregation is a legitimate tax strategy, not an illegal act of fraud, and it is 100% legal and has been used by taxpayers since the early 1980s.  It is important to understand that cost segregation itself isn’t a plan of action; instead, it is the tool or methodology used to perform cost segregation studies.

A qualified cost segregation firm will perform a physical observation of your property (a top-down approach) supported by lease and other financial information. Using the latest IRS tax code, they will identify all components that would typically be depreciated over 39 years which can be legally reclassified to 5, 7, or 15 years. Next, they prepare a comprehensive report for your review and signature, which you will attach to your tax returns during filing. 

Any commercial property owner with depreciable assets (buildings, land, property improvements) qualifies for a cost segregation study. A business owner with marginal income tax accounting experience will quickly recognize the benefits of the completed analysis and determine if it is in their best interest to proceed.

Is hiring a Cost Segregation Specialist beneficial?

A cost segregation study is a detailed analysis that allows you to maximize the legal tax deductions you are entitled to when filing your annual tax returns. The result of a properly prepared study is usually dollar-for-dollar federal income tax savings, increased cash flow, higher net worth, and perhaps most importantly, more incredible future wealth.

Cost segregation may be an excellent method for offering financial benefits to a wide range of homeowners. Because the advantages earned from cost segregation apply to many income-producing properties, there is a strong demand for skilled experts who can use the bottom line.

The IRS has recently upped the number of its audit. One red flag that might result in an audit is a cost segregation study, but the IRS frequently uses it to underpin their findings. Having your return audited will take time and money away from you, so hiring a non-qualified individual or business to conduct a study would be pointless.

A Cost Segregation Specialist can study financial documents and other data provided by the client to segregate the personal property assets from the real estate assets. The segregated assets are then depreciated over shorter recovery periods. Such studies are used to accelerate depreciation for personal property assets and increase wealth by reducing tax liabilities. This is especially true in real estate transactions because real estate investors can be subject to Alternative Minimum Tax (AMT). The use of cost segregation studies could reduce or even eliminate the alternative minimum tax on any given project.

The cost segregation specialist is the one who performs and manages the study and communicates the results to their client. Much insight and skill are needed to segregate assets into various recovery periods, especially with commercial real estate. Experience in real estate as either a property manager or investor will help a consultant perform a cost segregation study. Your client must understand the basics of cost segregation and how it fits into their organization’s financial picture; thus, a CPA designation is also helpful. Along with any of these designations, a successful consultant must perform and manage the study and communicate results to their client in an easy-to-understand manner.

How does one become a cost segregation specialist?

The Cost Segregation Industry Council (CISC) representative suggests that designation is only meant for individuals who are members of this Council. There are some prerequisites that they seek to fulfill before they consider membership. To become a member, one must have an undergraduate degree in accounting or finance and two years of experience with cost segregation consulting.

The CISC also recommends the individual show evidence of excellent knowledge through continuing education credits. The individual must be involved in other professional organizations, such as APMA (American Professional Management Association), ISMA (Institute of Management Accountants), and NCAS (National Cost Segregation Alliance).

The individual must be a CPA and/or licensed in one or more states. 

The CISC mentions that not all cost segregation firms can meet the above criteria but that these are the basic qualifications for an individual CS specialist. 

The CISC is a privately held organization and has the following mission statement: 

To further education and innovation in cost segregation studies, increase investor confidence and public awareness while promoting adherence, and establish standards and ethics. The CISC is focused on the study, practice, and promotion of cost segregation to ensure equity among its membership.

“The Council was formed by a group of consultants who had started referring to themselves as “Segregationists.” They felt they needed to establish an organization that would: certify its understanding and experience in cost segregation, offer continuing education programs (seminars), develop ethical standards for the industry, enforce compliance through our Ethics Compliance Program, and provides internet resources to promote awareness and recognition of the growing use of cost segregation.” 

The function of a Cost Segregation Specialist under the CISC:

The Cost Segregation Specialist is the liaison between the owner and independent consultant (segregationist) who develops and completes a cost segregation study. The specialist educates the owner about his current asset(s), provides an analysis of how much can be depreciated by filing Form 3115, assists with preparing the study findings, and provides an action plan that includes a timeline to implement changes.

The Cost Segregation Specialist must obtain a thorough understanding of all depreciation guidelines from the IRS and maintain a complete understanding of how to implement cost segregation studies.

The Cost Segregation Specialist’s goal is to ensure that the proper methods are used for filing Form 4562, Depreciation and Amortization (Publication 946), and ensuring compliance with the IRS.