Can a cost segregation study be applied to buildings or leasehold improvements not yet constructed?
Yes! A cost segregation study can literally begin at the concept phase long before plans are drawn.
The cost segregation study could be completed:
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Once the Certificate of Occupancy is issued and,
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the final tax-basis is ascertained from the final AIA 702s and 703s in collaboration with your CPA.
When a cost segregation provider is engaged at the concept phase recommendations can be made to you and your architect, engineer, and builder that will actually “create” short-life assets from what would have been 39-year assets were cost segregation applied post-construction rather than pre-construction. When cost segregation is applied in this manner a reduction of real estate taxes, use taxes, and property insurance costs results. Additionally, applying cost segregation at this initial phase allows for sound planning with your lender. Due to the additional cash freed up by cost segregation, it is probable you can receive a reduced interest rate on your mortgage as well. Debt/service ratios are important and better ratios translate to lower mortgage costs. Look at this example:
Furthermore, when cost segregation is utilized in the beginning, an architect is given more freedom to design a more appealing and versatile building for the client. The reason…there is greater cash flow as a result of the cost segregation study.
All parties should consult their tax professional for further information on how to apply the cost segregation results for income tax purposes.
Contributed by Jeffrey M. Hobbs, Managing Director
Segregation Holding Limited