History of Cost Segregation

Cost segregation evolved as the result of multiple court cases and IRS rulings. The body of knowledge is summarized in the Audit Techniques Guide (ATG), published by the IRS. Component depreciation was a prior methodology that produced similar results via separating a building into components. These components often included the roof, plumbing, electrical and elevators. There were concerns some investors were using component depreciation in an abusive manner. As a result of the tax law changes in 1986, tax rates were lowered substantially but many tax reduction techniques (such as component depreciation) were eliminated. From 1987 to 1996, there was a limited ability to depreciate any portion of a real estate separately. Some owners and tax practitioners experimented with assertions that portions of the cost basis were personal property (Section 1245) and not real estate (Section 1250). The case for differentiating between personal property and real estate was HCA (Hospital Corporation of America). After this case was determined in 1996, the IRS decided not to appeal it. Depreciating real estate offered more potential for tax deductions and tax reductions. The following is a summary of some of the items prescribed and the depreciable life in years: Vinyl Tile