Question

The Sale of a “Cost-Segregated” Building Many taxpayers have “cost-segregated” their buildings.

This means that an engineering study is done to determine whether some of a building’s cost can be segre-gated into tangible personal property (generally a 5-year or 7-year MACRS life with accelerated depreciation) rather than real property (a 27.5-year or 39-year MACRS life with straight-line depreciation). The faster depreciation for the tangible per-sonal property yields significant tax savings. A CPA is determining the gain or loss from disposition of an office building. A sale document details the selling price of the land and building. However, the building was cost-segregated and the CPA finds records of cost and related depreciation for the tangible personal property that was part of the cost seg-regation. No mention of this tangible personal property was made in the sale agreement, but the building and all of its contents were sold.

What should the CPA do? Your analysis for the CPA should focus on how the cost segregation impacts the realized and recognized gain or loss?

Answer 1

The classification of property as tangible personal property rather than the real property is certainly unethical in order to save capital gain taxes. In this case, the company has sold the property and the realized gains will be lower ,thereby lowering the taxes. This amounts to tax evasion and the CPA must not encourage the company to do such classification as the same will be most certainly be found out by the IRS during the tax audit. Also, although the company my save a few millions in taxes now, if the same is discovered by IRS, the penalty on incorrect asset classification will be multifold and the costs will exceed the short term benefits now.  The CPA can offer alternative tax saving methods to the business and not encourage this practice.