Real Estate property is classified in two categories: Residential and Non-Residential. Residential Property is depreciated over 27.50 years and non-Residential property is depreciated over 39 years. Both are depreciated on a straight-line basis and not on an accelerated basis.
There are two accelerated methods of expensing depreciation that the Internal Revenue Service provides – bonus depreciation and section 179 expensing. These accelerated depreciation methods are NOT available for real estate property operated as part of a trade or business.
Therefore, the only depreciation allowed by the Internal Revenue Service for these two types of real estate property is straight line over 27.5 years for residential real property and over 39 years for nonresidential real property. It will take a long time to recover the purchase of real property as an expense.
Real property consists of all of infrastructure including elevators, the building envelope, escalators, alarm and security systems, HVAC system, and structures attached to the interior of the real property. These components of real property, which are included in the depreciable base of the building, can be separated out and costed. These separate costs can be depreciated quicker than attaching them to the real property multiyear depreciation regime. This is what a Cost Segregation study does.
A cost segregation study is usually performed by an Engineer along with an Accountant. The Engineer draws out these internal systems as a separate asset to cost, which is performed by both an Engineer and an Accountant.
A Cost Segregation study can take an average of 45 – 60 days. A fee for any firm performing such work falls in the range of $ 5,000 - $ 15,000 per cost segregation study.
Author: Angelo Liberati for Accountants On Air