Internal Revenue Service, Real Estate Cost Segregation and Income Tax


Cost segregation studies are prepared for a variety of reasons (e.g., income tax, financial accounting, insurance purposes, property tax), and many different methodologies and procedures are used. While neither the Service nor any group or association of practitioners prescribes a specific methodology, there are certain approaches (e.g., studies based on actual costs or on proper estimation techniques) that produce more accurate and reliable allocations. Despite the use of one of these more reliable methods, issues may still arise with respect to the proper classification of IRC § 1245 property.

What’s New

Rollover of gain from empowerment zone assets.Recent legislation extended the election to roll over gain from an empowerment zone asset. For more information, seeRollover of Gain From Empowerment Zone Assets,later. The election is available for 2018 and 2019. If you are eligible for this benefit for tax year 2018, you will need to file an amended return to claim it. SeeIRS.govfor more information about amending a tax return.

Deferred gain from sale or exchange of Qualified Opportunity Fund (QOF).If you sold or exchanged your investment in a QOF and need to report the gain previously deferred, report the gain on Form 8949. SeeSpecial Rules for Qualified Opportunity Funds,later. Also, see the Instructions for Form 8949.

Approaches that yield accurate cost allocations expedite the Service's review, saving time and resources for taxpayers, practitioners, and Service examiners alike. A study that is both accurate and well documented is considered (in this ATG) a “quality” cost segregation study. The specific characteristics that comprise a quality study are described inChapter 4 - Principal Elements of a Quality Cost Segregation Study and Report.