Discussion:Cost Segregation Specialists
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| + | {{ForumReplyPost|UserID=Proptaxguy|Date=25 October 2007|Text=You may want to clarify exactly what they are talking about as far as "tax" savings. They may be looking to reduce your property tax liability by cleaning up the large lump sum entries that typically are capitalized with a major renovation. You would be amazed at how much money you are paying for property taxes for assets buried in these costs that have been gone for years. Hotel rooms get refurbished quite often and the new costs are capitalized without completely retiring the original assets. The "We'll save you 46,000 in tax in the first year, and even more in the next few years." sounds more like a property tax savings project to me.}} | ||
Revision as of 19:20, 25 October 2007
Discussion Forum Index --> Advanced Tax Questions --> Cost Segregation Specialists
Discussion Forum Index --> Tax Questions --> Cost Segregation Specialists
RidenourEA (talk|edits) said: | 25 October 2007 |
| I have a client who owns a motel. He has been approached by a Cost Segregation Specialist copany that analize assets and depreciation to see if certain costs can be depreciated quicker. Apparenly these companies are known to target motels.
Does anyone have any experience with this type of company? If so, any comments would be greatly appreciated. | |
| October 25, 2007 | |
| I have a client in the business, but have never used one. It seemed like a lot of smoke and mirrors in my opinion. Here's why: the client's getting all the depreciation eventually anyway. So timing is key. If they're coming on a property that's already been in service a while, what are they going to do? Charge thousands, maybe tens of thousands, to speed up depreciation a bit? Just seems a bit overkill to me. They make it sound like it's really something, but to me, unless you're loading in a relatively new building and can do this from the get go, it's much ado about not much. | |
RidenourEA (talk|edits) said: | 25 October 2007 |
| JR1-thanks for the reply. These were my thougts also. One question I did have-If the client goes this route and depreciation changes-do I amend returns? Or is there some kind of current year adjustment? | |
| 25 October 2007 | |
| I have seen these in action as well. I would ask for a preliminary analysis and a fee quote. I have a firm that I refer cost seg work to, and they always do a preliminary analysis and a fee quote to show whether there is a benefit to proceeding with the study. Of course, the benefit is a time value of money benefit, so generally there has to be a lot of value there. In addition, I would suspect they target hotels because there is a lot of opportunity for benefit. | |
| 25 October 2007 | |
| Consider this: They redo the parking area, paving , stripes etc. You as the acct will know the cost. Maybe it will last 15 years. The carpeting wont't last 39 years. It will have to be replaced sooner. The furniture and beds and linens are a different amount. Be realistic, you can probably do the analysis by using realistic depreciation. | |
| 25 October 2007 | |
| They can generate a lot of savings in the right circumstances looking at time value of money concepts. On the other hand, upon final disposition, that accelerated depreciation becomes ordinary income recapture instead of unrecaptured 1250 gain. | |
RidenourEA (talk|edits) said: | 25 October 2007 |
| If the client goes this route and depreciation changes-do I amend returns? Or is there some kind of current year adjustment? | |
| 25 October 2007 | |
| Are you required to use such a Cost Segregation Company? Can the client do it himself? I had a small client that made some leasehold improvements as lesee. They were an architecture firm, so some of the improvements were fairly expensive (but I could see that some were theorectically in the nature of "personal property"). I think it ended up as 15 year property instead of 39 year anyway. But I called one of these cost segregators, and they told me, it was not worth it, it would cost my clients too much. Now these guys are architects to begin with, why can't they do it? Weren't the detailed lists the IRS put out for the restuarant industry as far a determination of leasehold property fixture vs. personal made for the landlord or tenant to appy themselves? | |
| 25 October 2007 | |
| I have a restaraunt client that was approached by one of these companies, they gave him a preliminary analysis that showed that he would save $46,026 in the first year. That was on an ESTIMATED tax rate of 36%. So here's what my client heard, "We'll save you 46,000 in tax in the first year, and even more in the next few years." Problem is, this partnership (restaraunt) had a loss of 93,000 using just regular 39 yr depreciation in that first year (2006 was the first year). They were going to charge a fee of $6,950 to provide the in-depth analysis. It took me almost a full hour to explain to my client that he was NOT going to save $46,026, he had ZERO tax liability already. | |
Death&Taxes (talk|edits) said: | 25 October 2007 |
| Obviously cost segregation analysis is a growth industry. It came in when day trading went out.
That's a lie, but the initials HCA have a lot to do with it. | |
| 25 October 2007 | |
| If the client goes this route and depreciation changes-do I amend returns? Or is there some kind of current year adjustment?
It’s a 481(a) adjustment, taken all in the year of adjustment. It is a change in accounting method so you have to file a 3115 with the appropriate attachments, but it’s an automatic change so you will be approved, you just have to file the form. I think you can find what you need in Rev. Proc. 2002-9, Section 2 and the appendix (it’s been a while since I’ve gone over this so don’t hold me to that Rev Proc). You basically figure out what depreciation was under the old method and what it should have been under cost seg (the new method) and the difference is your additional deduction in the current year. Then you depreciate the assets under the new method on a go-forward. The audit technique guide has a lot of info on cost seg: [1]. I think one of the requirements to do a cost seg is that you need an independent appraisal, so you can’t just guestimate. You need to pay a professional. The time-value/cost-benefit issues that have been pointed out are important - just make sure your client isn't paying for something that isn't really there. Cost seg has a time and a place, but it's not for everyone. | |
Proptaxguy (talk|edits) said: | 25 October 2007 |
| You may want to clarify exactly what they are talking about as far as "tax" savings. They may be looking to reduce your property tax liability by cleaning up the large lump sum entries that typically are capitalized with a major renovation. You would be amazed at how much money you are paying for property taxes for assets buried in these costs that have been gone for years. Hotel rooms get refurbished quite often and the new costs are capitalized without completely retiring the original assets. The "We'll save you 46,000 in tax in the first year, and even more in the next few years." sounds more like a property tax savings project to me. | |
