How Do I Begin?
The IRS requires that an engineering-based study be conducted by a qualified professional to reclassify such components of your facility. For self-storage, these studies typically cost between $4,000 and $7,000. Most reputable companies will provide you with a no-cost estimate of your potential tax savings before conducting the study.
A successful and reliable cost-segregation study will require a detailed analysis of direct and indirect construction costs, a review of construction drawings (if available), an inspection and observation of components, expertise in specific mechanical and electrical systems, detailed documentation, and an extensive knowledge of the tax code as it pertains to cost segregation, among other things. It’s important that the study is done correctly and by a reputable firm in case the IRS has questions.
The accompanying chart provides an example of how cost segregation can be applied and the possible tax savings you might anticipate if your situation is similar. Self-storage owners should discuss this with their accountant and legal counsel before applying cost segregation to their depreciation schedules.
Cost Segregation: Potential Tax Savings
Current Method: Accumulated Depreciation Reported, 39-Year Straight-Line
Alternative Method: Cost-Segregation Study, Accumulated Depreciation
Increased Accumulated Depreciation Expense
Tax Rate (Estimated)
Estimated Accumulated Tax-Savings Benefit
Source: Cost Segregation Services Inc.
The owner represented in the chart will receive an estimated $492,167 in additional accumulated depreciation expenses in year one. This will lead to an additional $177,180 in deferred tax payments, which the owner can use interest-free until the property is sold and the depreciation is recaptured.