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The ideal time to begin a Cost Segregation study is when plans are drafted to purchase, construct, expand or remodel a building. If possible, the study should be completed in the year the building is placed in service.
However, a Cost Segregation study can be performed on any property as far back as 1987. Recent IRS procedures make it easier for you to reclassify your assets without amending prior tax returns. You can recapture all of the understated depreciation expense for any asset that has been improperly classified in previous years.
For example: You placed an asset in service in 1990. Its original basis was $100,000. The tax life you gave this asset was 31.5 years and the depreciation method was straight-line. This asset has depreciated 60% over 20 years. The remaining basis of this asset is $40,000. The correct life of this asset should have been 5 years. The IRS states that if you have truly made an error in the classification of an asset -- as in this case -- you can make a correction to this asset without being penalized. Therefore, you can bring forward the understated depreciation expense of $40,000 (remaining basis) in the year that you are correcting the misclassified asset. According to the IRS, the full amount of the understated depreciation expense deduction (remaining basis) can be claimed on your tax return in the year of change.
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