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June
2003
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Cost
Segregation
We
would like to take this opportunity
to describe a very important tax
break approved by the IRS for owners
of residential rental property and
other types of buildings purchased
or constructed after 1986. This tax
break is called "cost segregation." The
tax savings can be very substantial
and realized immediately.
Most owners of residential rental property depreciate
the entire cost of their building over 27.5 years.
Owners of other types of buildings, such as offices,
retail space, grocery stores, restaurants, warehouses,
and manufacturing plants often depreciate the entire
cost using a 39-year or 31.5-year depreciation period,
depending upon the date of acquisition. Under IRS cost
segregation guidelines, however, a significant portion
of a building's cost can be depreciated over much shorter
periods, usually five or seven years!
The cost segregation rules are complicated, but in
brief, they allow a taxpayer to separately depreciate
components of a building that are unrelated to its "operation
and maintenance" over the shortened depreciation periods.
In addition, these depreciation deductions are computed
using an accelerated depreciation method (the "200
percent declining balance method") which allows costs
to be recovered at twice the rate that applies under
the "straight-line" method. The slower straight-line
method is used to depreciate residential rental property
and other types of buildings.
Many types of building components can qualify for the
shortened depreciation period and accelerated depreciation
method. It would be impossible to list them all, but
common examples include molding, millwork, and other
decorative elements, carpeting, wall coverings, partitions,
window treatments, counters, cabinets, shelving, special
lighting, specialized machinery and equipment (such
as kitchen equipment), and the costs of plumbing and
electrical allocable to such equipment. In addition,
certain land improvements located outside of a building
may be depreciated over 15 years. Land improvements
include items such as landscaping, fences, sidewalks,
curbs, parking lots, lighting, utilities, signs, swimming
pools, tennis courts, and playgrounds. Depending upon
the type of building, you can expect to deduct between
10 and 60 percent of its cost over the shortened recovery
periods.
Please contact us if you feel that we can be of assistance
to you in these matters.
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Veres
& Company
Certified Public Accountants
Freedom Square Office Park
4401 Rockside Road, Suite 406
Independence, Ohio 44131
(216) 524-8422
Fax (216) 524-2624
e-mail: staff@veres.com
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