History of Cost Segregation
The history of cost segregation essentially goes back to the beginning of the income tax in the U.S. Ever since the congress started imposing income taxes on the wealthy, their lobbyists have been seeking relief. The higher the tax rates, the more aggressive congress and lobbyists have been in providing relief for income taxes.
Additional depreciation, such as offered by cost segregation, is just the latest is a series of many options to provide real estate investors and industrialists tax relief and motivation to invest in growing the economy. Forty years ago the same concept was termed “component depreciation”. Component depreciation was a different process but offered the same result.
The current version of cost segregation is based on the seminal HCA Hospital versus the IRS case (decided 1997). After the IRS lost a protracted legal battle, they decided the legislative intent was for the option to separate components and increase depreciation. Instead of continuing to fight, the IRS developed the IRS Cost Segregation Audit Techniques Guide, which is a reliable source of what can and can’t be allocated as short life depreciation. Our technicians know the Audit Techniques Guide almost by memory.
Normally, there is a Yin and Yang of tax rates and tax deductions. When tax rates go up, so do tax deductions. The Tax Cuts and Jobs Act of 2017 was different in this respect. It BOTH reduced income tax rates and increased tax deductions, particularly for owners of real estate and equipment.
The Tax Cuts and Jobs Act of 2017 is also generous and ground-breaking in providing bonus depreciation for purchases of existing buildings instead of just newly built properties.
This is a huge change compared to the last bonus depreciation for real estate in 1981 which ONLY included NEW construction.