Evaluating Cost Segregation Opportunities before, during, and after the Usage of Qualifying Realty

Abstract

The Hospital Corporation of America, 109 TC 21 (1997) case validated the use of cost segregation to maximize cost recovery deductions by reclassifying portions of realty as either depreciable personalty or realty with a class life shorter than that for buildings. Cost segregation efforts have been facilitated by IRS pronouncements that allow a taxpayer to treat a change in an asset's cost recovery period as a change in accounting method and thus accelerate into the year of change the cumulative increase in depreciation deductions resulting from such reclassification. One pronouncement even allows a taxpayer to change the recovery period within a limited period of time after the asset is sold or exchanged. This study develops and illustrates a comprehensive spreadsheet that projects the estimated tax savings and costs of electing cost segregation for realty at three different points in time: (1) when the realty is first placed into service, (2) during the useful life of the realty, and (3) after the asset is sold.