Cost segregation is a powerful tax strategy that allows commercial property owners to accelerate depreciation deductions and improve cash flow. However, a common concern among property owners is whether a cost segregation study (CSS) will impact their property tax assessments. While cost segregation primarily affects federal income taxes, there are certain ways it can intersect with property tax evaluations. Understanding these nuances can help property owners make informed decisions.
Cost Segregation and Property Tax Assessments: The Key Distinctions
Property taxes are assessed based on a property’s fair market value (FMV). Local tax assessors determine this by using approaches such as sales comparisons, income potential, or cost-based valuation. In contrast, cost segregation focuses on reclassifying property components for federal tax depreciation purposes. Since these two methodologies serve different tax functions, a cost segregation study does not automatically alter a property tax assessment.
How Cost Segregation Could Influence Assessments
While cost segregation is not directly used for property tax calculations, it can have indirect effects:
- Reclassification of Assets – A cost segregation study identifies building components that qualify for shorter depreciation lives (5, 7, or 15 years) instead of the traditional 39-year schedule for commercial real estate. Some jurisdictions may rely on detailed cost breakdowns for assessment purposes, potentially leading to a reassessment of property value.
- Impact on Reported Property Value – When a property owner submits cost segregation data as part of financial reporting, assessors may have access to more granular cost information. If assessors use this data to reassess the property, it could impact property tax liability.
- Renovations and Improvements – If a cost segregation study is conducted as part of a renovation or acquisition, assessors may view improvements as increasing the taxable value of the property.
- Potential Benefits for Property Tax Appeals – A cost segregation study can sometimes be leveraged to challenge property tax assessments. By demonstrating that certain building components depreciate more rapidly, property owners may argue for a lower valuation and reduced tax liability in jurisdictions where asset-specific breakdowns are considered.
Best Practices for Managing Property Tax Impacts
To mitigate unintended property tax consequences while maximizing the benefits of cost segregation, property owners should:
- Understand Local Tax Assessment Methods – Since property tax rules vary by jurisdiction, knowing how local assessors determine value can help property owners navigate potential impacts.
- Maintain Separate Records – Keeping cost segregation depreciation records distinct from property tax documentation can prevent assessors from misinterpreting the data.
- Engage a Property Tax Consultant – Working with a professional who understands both cost segregation and property tax law can help minimize risks and optimize tax savings.
- Use Cost Segregation Strategically – Timing a cost segregation study appropriately can help prevent unnecessary reassessments. For example, once a tax assessment has been completed
Conclusion
Cost segregation, designed for federal income tax benefits can have indirect implications for property tax assessments. Property owners should be aware of how their local jurisdiction assesses value and take steps to manage any potential risks. With careful planning and expert guidance, they can reap the benefits of cost segregation while minimizing any unintended property tax consequences.
Ready to maximize your tax savings? Contact CSSI today to see how a cost segregation study can help you!
