Cost Segregation for Renovations
Reduce Income Tax, Property Tax and Property Insurance
Prior to starting renovations of recently acquired or existing properties, buyers or owners must first allocate the purchase price or segregate the construction cost between tangible assets, such as non-depreciable land and depreciable assets such as buildings, land improvements, and tenant improvements for occupied and vacant spaces.
The allocation must be based upon the appraised Fair Value or Market Value In Use of all the assets acquired, balanced to the final purchase price. Renovation costs of existing properties must be segregated and balanced to the final capitalized construction cost.
This establishes the baseline tax basis for portions of the property that may be disposed of and/or replaced as part of the renovation process. While further breakdowns are often required to match specifics of the demolition plan, strong tax audit documentation support is thereby created.
Renovation generally involves removal of existing building components such as ceilings, floor finishes, light fixtures, ductwork, walls, wiring, plumbing, etc. The remaining tax basis can be written off if the acquisition is properly valued and allocated to removed components.