Comments on: Hype Or Opportunity: Cost Segregation

By: Rob Plomgren

Rob Plomgren — Wed, 07 Oct 2009 22:09:38 +0000

The IRS actually published audit guidelines for cost segregation in 2004. They have requirements for a compliant study. Compliant, fully engineered studies are generally not coming under the scrutiny of the IRS. Rather, “template studies”, which clearly do not adhere to IRS guidelines, are coming under scrutiny.

Cost Seg is just about the “last man standing” as a bona fide method of pulling money out of real estate holdings in this environment. Simply, it’s all about net present value of the tax benefits. if the net benefit is greater than 10 times the cost of the study, it usually makes sense. Larger buildings will have a ratio of 18-25X….a very compelling value proposition. An engineered study will usually yield more benefits than an accounting based study. Why? A CPA is not trained to read blueprints, as built drawings, etc. Cost seg is really an IRS guidelined, engineered technique that yields a tremendous tax benefit.

By: JD

JD — Mon, 06 Jul 2009 22:39:10 +0000

Cost Seg has become under a lot of IRS scrutiny (due to the saturation you alluded to). Too many out there taking advantage of the market place and doing very poor jobs. Anyone having a firm do it in the ‘hundreds’ should be very nervous in case of audit. The reason CPA’s don’t do this is because it is an Engineering Study. Granted, on new builds CPA’s can estimate and come pretty close, but will it withstand IRS scrutiny if they are incorrect? For example, what depreciation should the mechanical components of an elevator have in an apartment complex? The belts? The lights? The hardware? The carpet?

If you truly want to be protected and get the maximum depreciation allowable, it’s best to have a true Engineering Cost Seg Firm do the work. You should always get an ROI of at least 10:1 which makes financial sense for most and you will be fully protected in case of audit.

If you like to use your CPA estimates and hope the IRS never comes a knockin, stick with that route.

My two cents!

By: Nicole

Nicole — Sat, 14 Feb 2009 11:52:48 +0000

Tim, thanks for shedding some light. The rework is what I'm worried about but this sure is worth a try. Thanks again. Nicole’s last blog post: Factors to Consider When Joining Real Estate Investing Seminars

By: Tim Hawkins

Tim Hawkins — Sat, 14 Feb 2009 00:49:49 +0000

Sure does. Thank goodness for the internet; helped us find the players, sent an RFP right on their webpage, and we got a reply within a few days. No long sales talks on the phone or waiting for the brochure in the mail. Quick and successful. Efficient for them, efficient for us. The only ‘regret’ we have is that the folks we did hire were a little lax when it came to quality control, like so many small companies these days, so every one of the 7 had to be re-worked. The biggest deal was that they could have saved themselves quite a bit of time and money if they would have just sent us a preview via email rather than overnight (not our request) the “package” which were promptly returned to fix this or that. We didn’t care for the pretty package, we just wanted the numbers. Just a lack of attention to detail mostly. But, the IRS says you have to have a qualified/independent company do the work, so we make it happen.

By: Tom Koziol

Tom Koziol — Fri, 13 Feb 2009 23:56:56 +0000

Tim,

You have just underscored a cardinal rule: Shop till you drop when it comes to pricing a financial service. And, as you say, bigger sometimes only means a bigger price tag to do the same thing a less expensive service can do for you.

I am pleased to hear it worked out for you. Congratulations. The money really does look better in your pocket, doesn’t it?

By: Tim Hawkins

Tim Hawkins — Fri, 13 Feb 2009 23:50:06 +0000

Hi — we’ve done CSS’s on all 7 of our new properties. They’re only SFR’s worth about $165k/each. The biggest issue for us was that cost to do the study. We had one firm charge $645 and the other was $795. For this cost we were able to shift $40k (average per house) worth of deprecation from 27.5 into 5 and 15. We ran the numbers based on the present value (PV) of the cost and our estimated hold time of 15 years (exit strategy and mortgage length) and it made sense to us. We did get quotes from the big guys but they wanted way too much for the work. So, as usual. It depends. If the cost is high, then no. If the cost of the study is reasonable, then go for it. The key is to get a good sample of the savings (from a prior customer) that is very similar to your building, and then run the PV numbers to assure that your dollars are well spent.

oh, and our properties are in the GO Zone, so the numbers looked even better for us.

Hawk