Estate Planning & Cost Segregation Studies

Written by Steven D. Beaucaire, MST
Vice President, Tax - Bedford Capital Consulting


Contrary to popular misconception, the concepts of estate planning and cost segregation are not mutually exclusive. In fact, a cost segregation study (CSS) can enhance the estate planning process by lowering the tax burden of the property owner. Rather than trying to describe this, I will use an example to explain how they work together.

In our example, we will assume that a husband and wife own property jointly. They acquired this property by a purchase for $10,000,000 10 years ago and have been depreciating this property under MACRS 39-year class. At this point in time, a CSS is performed for adoption in 2006 with the following results.

              • 5-year property equals 18% or $1,800,000.
 
              • 15-year property equals 15% or $1,500,000.
 
              • 39-year property equals 67% or $6,700,000.
 
              • The basis property is $5,000,000 for the husband and $5,000,000 for the                  wife.
 
              • The husband dies in 2008 and a valuation is done on the property, as is                  required by law. The new valuation has the building at $12,000,000.
 
              • The basis of the husband is stepped up to $6,000,000 as it passes through                  the estate to the wife. Therefore, even though the valuation is for                  $12,000,000, the depreciable basis is only $11,000,000. The placed in                  service date remains the same for the wife's original assets, but a new                  placed in service date is used for the portion that passes through the                  estate.
 
              • At this point, a second cost segregation study can be performed as the                  property has been revalued. The results are shown in the table below on                  the line for 2008.
 
              • Let us further assume that the wife dies in 2012. The valuation placed a                  new value on the property of $15,000,000. As the entire property has gone                  through the estate, the valuation and the depreciable basis are the same                  and a third cost segregation study is done.

Please note that because the property went through the estate no depreciation recapture was required even though the owners were allowed to step up the basis of the property.

Cost Segregation & Estate Planning
Depreciation w/o CSS		With CSS	§481(a) adj.
Years 1-10	$ 2,446,700	$ 4,452,089	$ 2,005,389
2006*	$ 256,400	$ 260,438	$ 4,038
Net pickup initial CSS                                                             $2,009,427
Depreciation w/o CSS		With CSS	Addt'l Depreciation
2007	$ 256,400	$ 260,438	$ 4,038
2008*	$ 282,046	$ 344,483	$ 62,487
2009	$ 282,046	$ 501,201	$ 219,155
2010	$ 282,046	$ 424,176	$ 142,130
2011	$ 282,046	$ 375,489	$ 93,433
2012*	$ 208,650	$ 941,149	$ 732,499

*Years within which a CSS is performed.

The above discussed just one example of how cost segregation can be used in the estate planning process. Of course, there are other applications beyond the scope of this article such as the issues associated with partnerships and the implications of §754.

The two key benefits of using cost segregation in the estate plan are the acceleration of depreciation and the ability to avoid potential recapture. Both have a significant and positive impact on cash flow.