How Engineered Cost Segregation Can Help Your Estate Plan

Ok. The info below isn't exactly real estate law, although it has a strong real estate component.  However, how we own our real estate and account for it, taxes and estate planning are all intertwined.  The information below can be quite useful for owners of commercial real estate; particularly those who are small family-owned businesses.  Thanks to Duffy+Duffy Cost Segregation Services for supplying this information.


The two key benefits of using cost segregation in the estate plan are the acceleration of noncash depreciation and the ability to avoid potential depreciation recapture tax. Both dramatically reduce taxes(through deferrals), and have a significant and positive impact on cash flow.

For any income producing commercial property purchased, constructed, inherited, or passed through an estate post-1986, an engineered cost segregation study report can generate a significant Sec. 481(a) Depreciation Adjustment in the current year. IRS Rev. Proc. 2002-9 and 2002-19 provide authority to claim this Sec. 481(a) Adjustment in the current tax year, by automatic consent, without amending tax returns. Compared to straight-line depreciation without engineered cost segregation, cost segregation studies typically result in double the noncash depreciation deductions over the first 15 years of ownership.

Estate Example:

Let's assume that in 2004, a husband and wife purchased a $1M building, and capitalized the asset at the statutory 39 year life, straight-line depreciation method. They learned in 2010 about accelerated depreciation with cost segregation. They hired cost segregation professionals who identified 34% of the $1M asset as IRC Sec. 1245 Assets and Land Improvements that were 5 Yr, 7 Yr, or 15 Yr Assets, and claimed a $300,000 Sec. 481(a) Depreciation Adjustment in 2010 by Automatic Consent of the IRS.

In 2011, the husband died and the wife received a step up resulting in a new basis of $2 million. Updating and Applying engineered study results against the new basis might identify approximately $680,000 of additional shorter life components to be accelerated over the ensuing five years, deferring significant income taxes for the wife.

Upon the death of the wife, the property would receive a new basis of the current value at that time, which may be $3 million. The cumulative result of the application of cost segregation to this point yields approximately $980,000 that is never recaptured through gain on sale. The heirs or children would then be able to have the cost segregation study updated using the new basis and defer income taxes with the accelerated depreciation.

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