Change of Accounting Method
The IRS allows owners to modify the recovery period from an incorrect method to a correct method through an automatic procedure, thus encouraging owners to depreciate real and personal property correctly. The best thing about this change is it allows you to claim catch-up depreciation, which could have been claimed in prior years (back to 1987) had cost seg been used.
A successful cost-seg study requires:
- A detailed analysis of the hard and soft construction costs
- A review of construction drawings and specifications (if available)
- An inspection of the improvements to identify construction means, methods and use
- An understanding of specific building, mechanical and electrical systems
- A detailed knowledge of the tax code as it applies to cost segregation
- Combined with the ability to understand the tax and financial issues involved with real estate
Self-storage facilities make ideal candidates for cost-seg studies due to vast amount of site work required for construction. Site work such as paving, sidewalks, storm-water drainage, curbing, fencing, security lighting, underground utilities, etc., is specifically identified by the IRS as a separate asset category with a reduced life (15 years) compared to a building that has a recovery period of 39 years. Furthermore, there are other systems that can be depreciated over five- and seven-year periods, such as movable partitions, security, access gates, computerized locking or alarm systems.