A cost segregation study can allow the taxpayer to depreciate the components of residential rental property or commercial property separately instead of depreciating the entire cost over 27.5 or 39 years. This may speed up depreciation by enabling a shorter recovery period.
The cost segregation study should be performed by an engineering or construction firm with experience completing these studies. The final report can be 30 or more pages of information on the actual cost records available, and the methods used to determine the building components and allocate the costs to these components.
The cost detail and cost summary in the report will be used to prepare the depreciation schedule on the tax return. Instead of listing just the building and the land, you will create separate assets in the depreciation module for 5-year, 15-year, 27.5-year, or 39-year property and land. You can list each asset in the cost detail of the segregation study or summarize by class life.
This process is straightforward when the cost segregation study is done at the time the asset is placed into service. When depreciation on the property started several years earlier, the additional depreciation can be claimed in the current year by filing form 3115 and requesting a change in the method of accounting for depreciation. This will require recalculating the depreciation and determining the adjustment to make in the current year.
Form 3115 can be completed on the IRS website, saved as a PDF, and attached to the current year return before e-filing.
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Additional Information:
IRS: Pub 5653 - Cost Segregation Audit Technique Guide