Cost Segregation Analysis With No Site Inspection
Eliminating the site inspection from the scope of work is the primary option to reduce the cost of a cost segregation study. The benefits are a lower fee. However, the risks include overstating or understating the amount of depreciation without appropriate due diligence. O’Connor’s team approach to DIY cost segregation gives you the best of both worlds: lower cost and credible results. If deemed necessary, we will provide a site visit at our expense to insure a credible result.
It is necessary for the appraiser to look at the property on paper (sales, tax roll data) and via photos or video. Simply using a mathematical model is:
- not a credible method,
- does not generate a credible result and
- does not generate necessary documentation.
O’Connor does use statistical modeling for a portfolio of extremely similar properties (such as 100 fast food restaurants with the same brand). However, this is a detailed and tedious process. We select a representative sample, conduct detailed in-person site visits to these locations, develop a model and test the model.
Just using a model for one property not in line with the IRS Audit Techniques Guide, is imprudent and incurs unnecessary risk.
O’Connor’s Team Approach to DIY Cost Segregation
Our preferred version of DIY cost segregation includes a team approach:
- Your team provide video and pictures of the building (if possible)
- We discuss relevant issues with on-site staff and/or building management
- Your team provides basic information such as year built, year acquired, renovations, etc.
The minimal information we need is fairly limited. In some cases, we can obtain much of the information from public records.
What is NOT DIY Cost Segregations
A few cost segregation professionals have suggested a reasonable approach is to just use a mathematical model. The model typically has little information except size, year built, cost and year purchased. There are 100+ types of short-life items for depreciation, and they vary from property to property.
Just using a mathematical model can damage the tax payer in two ways:
- under-report allowable depreciation and
- grossly overstate depreciation.
While the IRS would not likely be too upset with too little depreciation, the primary focus on reviewing cost segregation reports are:
- is to insure the method is credible,
- determine whether the results are credible and
- to make sure the results are documented.
Numbers generated by a math model do not meet any of these three criteria.
- If you receive an inquiry about a cost segregation report we prepared, we will respond until we have satisfied the IRS. To date, we have always been able to explain our analysis with zero changes.
- If you do not save income taxes as a result of our cost segregation report, we will refund your fee.