Linda Martin Schumacher – Understanding Cost Segregation for Multifamily Apartment Buildings
What is Cost Segregation?
Cost segregation is the process of hiring an engineering firm to breakdown the individual depreciation lifespan of the components to a building so that these components can be depreciated quicker than over a 27 or 39 year depreciation lifespan of the building.
Ultimately, cost segregation works well for investors looking for tax savings by depreciating the components quicker than by depreciating an investment building as a whole.
Cost Segregation Services is an engineering firm that assists in breaking down the components of a building into five year, seven year, or ten year depreciation schedules. Remaining components will remain on 39 year schedule.
Who is a Typical Client?
Typical client includes real estate investors looking to grow their portfolio through the tax advantages of depreciation or are simply looking for tax savings and do not host a professional real estate designation according to the IRS.
However, those looking to call themselves a “real estate professional” by the IRS need to be careful. This is an area that is highly audited by the IRS and can lead to discrepencies.
How much does an Engineered Cost Segregation Study Cost?
It depends on the components of the building and the extent to which these items need to be segregated.
Keep in mind, the studies can take six weeks at a time, but, CSSI would warranty the work they perform on these components. As discussed in the episode, Linda believes the cost to savings is 10x or more to the investor.
Regulations towards PAD
PAD is the process of getting dollars back for components, in your building, that have been disposed. Those costs have to be used in the year components were disposed of, but, this is a further taxable benefit to the investor.
This is also important when investors need to expense a capitalized component rather than having to depreciate a capital expense over a given timeframe.
Linda also discussed if and when a repair should be expensed over a year rather than depreciated over a given timeframe.
What kind of CPA is friendly towards Cost Segregation?
Over the years, CPAs have begun more cost-segregation friendly. CPAs understand that if they are not cost-segregation friendly, they are going to lose your business!
Circular 230 requires CPAs to tell you all tax advantages made available to you. Ask for this from your CPA.
Timeframe Required for a Cost Segregation Study?
Length of ownership does not matter. If large repairs or capitalization expense has occurred, an investor should contact CSSI to discuss further.
What is needed to complete a Cost Segregation Study?
A depreciation schedule is required and it typically takes 2-3 business days for CSSI to provide an investor a general analysis as to what they will save and what the study will cost per building.
Then, the investor can make the best decision for them.
Furthermore, brokers can request a cost segregation study to show their clients the tax benefits! Banks also like cost segregation to improve cashflow when qualifying an investor for a new building purchase.
45L is a $2000 tax credit for each energy efficient dwelling. It is possible to go back to 2016 to obtain this tax credit and capitalized repairs like new windows, insulation, exterior doors could potentially qualify for this type of credit.
The important note is to ask your CPA for Safe Harbor qualifications.
Best way to Contact Linda Schumacher…
Obtain a quick info sheet on cost segregation at :
Email : email@example.com
Phone : 815-260-2943