A recent Court Case reminded me that sometimes taxpayers and their advisors can sometimes go too far in trying to create favorable tax situations. For many years now, taxpayers have taking advantage of using cost segregation studies to allocate part of the construction or purchase cost of buildings to items more closely related to equipment which have shorter lives for depreciation purposes and/or may be available for the Section 179 or bonus depreciation.
For example, if a manufacturer builds a new building that requires extra power to run the machines and special hoses and piping, etc., these costs can usually be depreciated over 15 years or less, rather than the normal 39 years. However, the taxpayer must have a cost segregation study to prove these amounts.
Now for the Court Case. In the case, the taxpayer had obtained a cost segregation study on a fairly large apartment complex that they purchased. This study allocated costs to almost every single component in each building, the sidewalks, the landscaping, the swimming pool, etc. If the taxpayer had been successful, then all of these components would have been most likely depreciated over 5 or 15 years, not 27.5 years.
However, the taxpayer lost since the Court said all of these components comprise what is normally considered an apartment complex which is depreciated over 27.5 years. They did allow some items to be depreciated over quicker lives, but not much.
The bottom line for me is if it looks like an apartment complex, then depreciate it like an apartment complex, or the old saying "If it walks and quacks like a duck, then it is most likely a duck". These cost segregation studies are a powerful tax planning tool, but they need to be done correctly and in the proper situation.