A BRIEF HISTORY Under prior law taxpayers would separate a building’s parts into its various components—doors, walls and floors. Once these components were isolated, taxpayers would depreciate them using a short cost-recovery period. CPAs referred to this practice as component depreciation. The introduction of the accelerated cost recovery system (ACRS) and the modified accelerated cost recovery system (MACRS) eliminated the use of component depreciation, but not the use of cost segregation. Hospital Corporation of America [HCA] v. Commissioner, 109 TC 21 (1997), is the seminal cost segregation case. In it the Tax Court permitted HCA to use cost segregation with respect to a multitude of improvements (see exhibit 1 ). Critical to the Tax Court’s analysis was that in formulating accelerated depreciation methods, Congress intended to distinguish between components that constitute IRC section 1250 class property (real property) and property items that constitute section 1245 class property (tangible personal property). This distinction opened the doors to cost segregation. Armed with this victory, taxpayers have increasingly begun to use cost segregation to their advantage. The IRS reluctantly agreed that cost segregation does not constitute component depreciation (action on decision (AOD) 1999-008). Moreover, cost segregation recently was featured in temporary regulations issued by the Treasury Department (regulations section 1.446-1T). In a chief counsel advisory (CCA), however, the IRS warned taxpayers that an “accurate cost segregation study may not be based on non contemporaneous records, reconstructed data or taxpayers’ estimates or assumptions that have no supporting records”

1. Nowadays, minuscule bank returns and a nervous stock
market have many turning to other investments. Those
placing their hard earned money (and credit) into the world
of Commercial Real Estate Investment, need to know their
tax incentive options, which mainly revolve around
“depreciation”.
Every commercial property should be depreciated properly, especially for those generating positive cash
flow. Furthermore, new construction properties over the past few years have additional “bonus
depreciation” eligibility as well. At a time when tax rates are increasing, not going after these benefits
can be quite costly.
GMG works with Commercial Real Estate Investors across the nation on maximizing tax incentives for
their investment properties. If you have constructed, purchased, or renovated, commercial real estate
over the past few years, let GMG complete a free analysis to determine your tax incentive opportunities.
Year after year, the Federal Government has continued to incentivize those who invest in Commercial
Property. The IRS has established guidelines that, if ignored, cause commercial real estate investors to
pay more in taxes than they should.
What guidelines are being ignored by Commercial Property Investors?
Those revolving around Accelerated Depreciation; known in the taxation world as Property Cost
Segregation.
Commercial real Estate Investment
Click video to play!

2. Ramifications of Improper Depreciation Allocation
Most commercial property investors do not truly understand the substantial benefits of accelerated
depreciation. This is evidenced by our analysis of thousands of depreciation schedules over the years.
We have found less than 10% of investors are properly depreciating their properties. The most common
misconception is, “I am going to get this money anyway”. Is this a true or false statement?
Let’s investigate…
1. Capital Gains vs Ordinary Income Rates
Although the mechanics of these calculations are not always as simplistic as we will be making it for
this example, the short response is – increased depreciation leads to paying taxes at the capital
gains rate as opposed to the ordinary income rate. Since capital gains rates are likely much lower
than the Investor’s income tax rate, they would benefit from accelerated depreciation.
2. Time Value of Money
Simply put, your dollar is worth more today than it will be in the future. A tax dollar saved today
therefore is worth more than a tax dollar saved in the future. Why lock up a tax savings in your
property for 27-39 years when you can receive it today?
3. Catch-Up Depreciation
If you have not completed a Cost Segregation study on your property that you have held for a period
of time, did you know that you can capture your entire missed benefit immediately? The IRS allows
you to complete a 481 adjustment thus enabling you to catch up all the missed accelerated
depreciation into the current tax year. This provision alone could save you hundreds of thousands
immediately!
4. The Power of Cash in hand
You are a real estate “investor”. This means you understand the investing power of having funds in
your hand today. Cash today [in the form of tax savings] enables you to invest in additional
properties. The benefits of this are exponential and allow continued growth of your investment
portfolio.
Correct allocation of real estate depreciation is essential for Commercial Property Investors to effectively
manage their tax situation. Are you one of the 90% who are missing out on opportunities that 10% of your
competitors are capturing?
Cost Segregation on Older Buildings?
It is impossible for me to calculate the number of calls I’ve
had with building owners and CPAs on the subject of Cost
Segregation. Working some numbers in my head (ok, on my
calculator), the number is likely well over 10,000. Out of all
those calls there is one particular item that continues to rear
its ugly, uninformed head and I can no longer stay silent. I
must respond… with vigor!
The “item” in question comes in the form of the following
quote, which I’ve heard too often to count:
“You can only do Cost Segregation on a new building or new
renovation.”
I have no idea where this rumor started. I hear it weekly and
now I am blogging in rebuttal.
First, I will say an unequivocal “Yes”, it is beneficial to have a
Cost Segregation study done when you purchase/construct/renovate a new building. In fact, anyone

3. constructing or renovating a commercial property should have a study completed. However, the true
power of Cost Segregation is displayed on buildings that are not new!
“But, you can only do Cost Segregation on a new building or new renovation”.
To officially rebut this statement, I will go straight to the source. The first sentence in the IRS Cost
Segregation Audit Techniques Guide – Chapter 6.2 reads:
“A taxpayer may conduct a cost segregation study on used property and then recompute its depreciation
deductions for prior years”. *
Not only “may” a taxpayer do this but over 75% of our projects are older properties. In the industry we call
this the “Catch Up” method, and it can produce powerful results.
Here is an example:
Mr. Client acquires a commercial property for $3,500,000 five years ago and never completed a Cost
Segregation Study.
Despite rumors to the contrary, Mr. Client recognizes he may now have an opportunity to benefit from a
study (maybe he read this blog post).
Mr. Client hires an expert (GMG for example), who identifies 20% ($700,000) of components that should
have been allocated to 5-year life instead of 39 years. Mr. Client jumps for joy when he realizes the IRS
will allow him to “catch up” $700,000 of missed accelerated depreciation on his next tax return!
Why doesn’t every building owner and CPA know this?
The answer is simple; it is not their area of expertise. Although some building owners and CPAs have
substantial experience with Cost Segregation, most do not. There is a dearth of true educators in this
field, which unfortunately leads to much misinformation. These factors have caused countless thousands
of building owners to miss out on this powerful tax savings strategy.
All is not lost!
If you own a building and have not had a Cost Segregation study performed, you have not missed the
boat. Hundreds of thousands, or even millions, of dollars in tax savings may be available to you. Now that
you are aware, let’s see how much you qualify for! Contact Us today for more information.
Alan B. Charity
Alanbcharity@gmail.com
(330) 828-1170