As a property owner or real estate investor looking to optimize your income tax deductions, cost segregation can be a game-changer. However, several questions linger: Can I do my own cost segregation study, or must I hire an expert?
This guide explains the conditions for conducting the study yourself, how to do it, and the risks.
As you’ll discover, working with cost segregation experts is better than using the do-it-yourself approach. For starters, you’ll want a study that complies with the IRS cost segregation guidelines.
You can work with us at Seneca Cost Segregation to get the help you need to legally reduce your tax burden by accelerating depreciation deductions on qualifying real estate components.
Each cost segregation study we do is IRS-compliant, and we’ll even defend it on your behalf if it’s challenged.
Get a free and professional savings estimate to find out how much you can save.
Quick Answer – Can I Do My Own Cost Segregation Study?
Yes, you can legally do your own cost segregation study for smaller projects if you have expertise and experience in engineering, tax law, and construction.
For larger and complex properties, it’s better to enlist the help of a service provider.
Who Can Perform a Cost Segregation Study?
The IRS Audit Techniques Guide for cost segregation recommends using a detailed engineering approach. Because of its complexity, there’s a short list of experts who can do a cost segregation study:
- Specialists with engineering experience, such as engineers, Certified Public Accountants (CPAs), or tax professionals, especially those specializing in real estate.
- Companies that specialize in cost segregation and apply a multidisciplinary approach that brings together engineers, tax experts, and accountants.
- Cost segregation engineers (Experienced engineers with expertise in tax law, accounting, and construction).
- Certified Cost Segregation Professionals (CCSPs).
CCSPs may not always be engineers or certified public accountants, but they have extensive knowledge of the methods used in cost segregation studies.
A CCSP can also have expertise in tax law, construction principles, and complex IRS cost segregation regulations.
The American Society of Cost Segregation Professionals (ASCSP) vets experts and issues the CCSP credential, the highest designation in the cost segregation industry.
Cost segregation engineers (engineers with cost segregation expertise) have strong backgrounds in construction, engineering, architecture, and taxation. They could be electrical, civil, or mechanical engineers.
DIY vs. Professional Cost Segregation Services
Choosing between a DIY cost segregation study and a professional one is easy once you know what to consider.
Let’s check out the key considerations for each option:
| DIY Cost Segregation | Professional Cost Segregation |
| A cost segregation study that you do yourself. | A cost segregation study done by an individual expert or firm. |
| Pros | Pros |
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| Cons | Cons |
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| Best For | Best For |
| Not ideal for anyone. A CPA should almost never recommend a taxpayer do their own study | Ideal for real estate investors and owners with larger, complex properties and an ROI mindset. |
A DIY study notably differs from a professional one in cost. While you pay no fees when you do the study yourself, you must be able to pay the cost of a cost segregation study when you work with professionals.
A professional study is also more advantageous because it can be more IRS-ready, given that the experts have greater expertise and experience with cost segregation.
You’ll also get audit support and defense, which the DIY option lacks. Most investors and owners who use the DIY route usually end up hiring professional cost segregation firms to represent them when they are audited.
How to Conduct a DIY Cost Segregation Study
Here’s how to do your own cost segregation study in six steps:
1. Gather the Necessary Information
Start by collecting all the available documentation, such as:
- Construction records
- Contractor payments
- Photographs of the property
- Recent property appraisals
- Blueprints, maps, floor plans, and other architectural drawings
- Invoices and receipts
- Purchase agreement
Proper documentation informs your process and claims and helps you comply with IRS guidelines.
2. Inspect Your Property
Examine your property thoroughly to identify its components and determine their value.
Some key components eligible for accelerated depreciation include roofing, electrical fixtures, plumbing, fencing, and flooring.
Oftentimes, you will need to purchase access to 3rd-Party verified databases.
3. Classify Assets
Categorize the identified assets or component parts into their respective depreciation period of five, seven, or fifteen years.
For example, exterior improvements like walkways and parking lots can be depreciated over 15 years.
Movable equipment and appliances not permanently attached to the building’s structure typically qualify for a 5-year depreciation schedule.
4. Determine Depreciation Deductions
Calculate the depreciation deduction for each component based on its value and classification. To do this, you will need deep knowledge of accounting, construction costs, and ensuring accuracy in the reporting.
Straight-line depreciation is easy to calculate:
Depreciation = Component Value ÷ Duration of the Depreciation
For instance, you have a building worth $850,000, and you identify that you can depreciate office furniture worth $140,000 over seven years:
Standard Depreciation = $850,000 ÷ 39 years = $21,794 per year
With cost segregation, the depreciation is much more complex and typically uses the MACR System. This is difficult to understand and also to explain.
If you have multiple eligible components, you will need to apply the correct depreciation per year to all of the property. Ensure you adjust the remaining worth of the building that will be under standard depreciation.
5. Determine the Tax Savings
Calculate the potential tax savings with accelerated depreciation based on your tax bracket.
For example, if your tax bracket is 37%, your first-year tax savings for the above example would be:
- Tax Savings with Standard Depreciation = Annual Standard Depreciation x Tax Bracket
= $21,794 x 37% = $8,063
6. Prepare the Final Report
Finally, compile a detailed report showing your methodology, component classifications, depreciation calculations, findings, and potential tax savings for the first year and in the future.
You’ll present this report to the IRS to claim the tax benefits.
How to Build Your Own DIY Cost Segregation Toolkit
Cost segregation is quite complex, necessitating an easy-to-follow toolkit to guide you.
Let’s see how you can assemble a handy toolkit:
- Gather Enough Information: Collect as much information as possible about cost segregation to understand the practice. A sample cost segregation study can be handy.
- Prepare the Necessary Tools: Assemble and prepare necessary tools such as Google or Excel Sheets for tracking costs and depreciation. You can also check out Seneca cost segregation calculator to estimate the potential tax savings to see if the study is worth it.
- Gather the Necessary Documents: Collect and prepare all the crucial property documents, including floor plans, blueprints, purchase agreements, and more.
- Make Checklists and Templates: You can make your own cost segregation study checklist to guide you through the steps to ensure thoroughness. You can also find ready-made asset classification templates to help you identify and categorize assets quickly.
- Download the IRS Cost Segregation Guide: To conduct a cost segregation study, the IRS will approve, check out, and refer to their guide (linked to earlier in the article) to ensure proper categorization and compliance with rules. Be warned: it is over 200 pages.
- Document Storage Solutions: Ideally, you should have a cloud system to save all your documents, process progress, and reports for future reference and updates.
- Design a Reassessment System: Have a system you can use to reassess your cost segregation study to maintain accurate depreciation calculations, especially after significant improvements or renovations.
Risks and Challenges of DIY Cost Segregation
You might face the following challenges and risks during a DIY cost segregation study:
- Poor Feasibility Analysis: If you perform a feasibility analysis poorly or fail to conduct one first, you might be wasting your time since the potential tax savings may not be worth the time and effort.
- The Study is Time-Consuming: Learning and executing the process can be time-consuming if you aren’t experienced in tax laws and construction costing. You’ll lose time you could use for other investments and business activities.
- Not Maximizing Your Tax Savings: You may short-change yourself by not capturing all the eligible potential tax savings.
- Costly Errors: If you lack experience, you might incorrectly classify assets or calculate depreciation. You might trigger an IRS audit, penalties, or canceled deductions. These can be more costly than a professional cost segregation service.
Instead of struggling with a DIY study, you can work with a cost segregation firm like Seneca. Our cost segregation studies are IRS-compliant and do not trigger audits.
If you are audited, we can defend the study and even refund the cost of the study if you qualify.
Additionally, you can count on us to maximize your tax savings, given our team’s expertise and years of experience in the practice.
Explore our cost segregation services to find out how much you can save if your property is eligible.
Frequently Asked Questions (FAQs)
Let’s wrap up with a few questions regarding cost segregation studies:
What Types of Properties Qualify for a Cost Segregation Study?
Cost segregation can apply to various types of properties, such as:
- Residential rental properties like single-family rental homes, apartment buildings, and condominiums.
- Commercial buildings like retail spaces, offices, and restaurants.
- Industrial properties like manufacturing plants and warehouses.
- Owner-occupied businesses.
What Happens If the IRS Audits My Cost Segregation Study?
If the IRS audits your DIY cost segregation study, you can defend it yourself or hire a professional service to defend it for you.
If you hired a professional cost segregation service like Seneca from the start, we can defend it on your behalf.
Can I Perform a Cost Segregation Study for Multiple Properties at Once?
You can conduct a cost segregation study for multiple properties simultaneously, but each property should have its own separate study.
Bundling the studies can save you time and money if your preferred firm offers a discount for cost segregation packages.
How Often Should I Conduct a Cost Segregation Study?
You only need to conduct an excellent study once for each property, and it can serve you for as long as you own it.
However, follow-ups and updates are necessary to capture significant improvements.
Generally, it’s best to conduct or update the study once every five years to maximize your tax benefits by ensuring that all your assets are not undervalued or new improvements overlooked.
Conclusion
When conducting your own cost segregation study, you’ll want to ensure you have the required engineering experience and expertise, as well as knowledge of tax laws, construction, and accounting.
You can forgo the cost of the study, but doing it yourself may not be a smart financial decision, as you may omit critical eligible assets. These omissions or accidental inclusions can prove costly later on.
You also risk getting audited by the IRS due to inaccurate calculations or aggressiveness caused by subjectivity.
To avoid these challenges, it’s better to work with a firm that can help maintain objectivity and bring all the required expertise and experience on board.
At Seneca Cost Segregation, we have experienced cost segregation professionals who ensure each study follows IRS guidelines to maximize tax benefits and avoid triggering an audit.
We also offer post-study support, which includes defending our work and findings if you get audited.
Contact us today to determine whether your property qualifies for cost segregation, how much you can save, and the potential ROI of the study.
