The Look-Back

Integrating a cost segregation study with the IRS provision for retrieving unclaimed depreciation from years, without the necessity to amend previous tax filings, can result in substantial financial gains. A look-back strategy can be advantageous, reaching back as far as 8 to 10 years.

Assume an investor purchases a single family property as an rental investment for $150,000 in 2022. According to the local property assessor, the market land value for the property is $21,000 leaving a residual value of $154,000 for improvements

Acquisition Cost

$ 175,000

Land Market Value

$ 21,000

Buildings and Structures

$ 154,000

Annual Deprecation

$ 5,600

The traditional method of capitalizing this acquisition would be to subtract the market value of the land from the acquisition cost and capitalize the residual $154,000 at $5,600 per year for 27.5 yers.

A cost segregation analysis was carried out using information provided by the property owner, which identified non-realty short-lived items and land improvements that, by definition, are not considered real estate. The results determined the property included:

Property Component

Allocation %

Alllocation $

Dep. Method

Current Tax Year

Personal Property

18.4%

$ 32,340

5 Year, 200% DDB

$ 10,866

Land Improvements

11.4%

Buildings and Structures

70.2%

$ 20,020

15 Year 150% DDB

$ 2,645

$ 100,100

27.5 Year SL

$ 7,280

$ 20,792

Current Year Depreciation Deduction

Depreciation Claimed in First Year

$ 5,600

Net Depreciation Gain

$ 15,192

Implementing the cost segregation study accelerates the depreciation of the personal property assets to a five-year, double-declining balance depreciation model and plan improvements for a 15-year double-declining balance method, greatly increasing the allowable deduction.

Additionally, since this is a look-back study, depreciation not taken in the first year is rolled into the current tax year allowing for deduction of depreciation not taken in prior years.