Tangible property

or "Chattel" as the IRS calls it, holds much value for tax reduction and powerful depreciation opportunities. The Walls Street Journal, in 2003, wrote that "Cost segregation is a lucrative tax strategy..." By utilizing this strategy you can help to maximize your cash flow, minimize our taxes and reduce your length of depreciation for shorter real estate investment hold times. In real estate, “chattel” means moveable, personal property. Generally, this means things in or on a building or land that can be removed without damaging the structural integrity of the building. But IRS regulations are not always intuitive. For example, a water heater is chattel but a furnace is not! Linoleum is chattel but tile is not!

The estimated amount of chattel in an average 1500sf home consists of approximately $15,000 - $20,000 worth of itemizations for depreciation. This can translate to a $3,000 to $4,000 reduction in taxable income in just the first year. If the property is newer, the value of the chattel is often much higher.

Let me give you a short list of things that you can define as chatterl:
Dishwashers, Refrigerators, Cabinets, Countertops, Ovens, Stoves, Range Hoods, Microwaves, Garbage Disposals, Window Treatments, Lighting Fixtures, Ceiling Fans, Built-in Desks, Wardrobes, Shelving, Ornamental Moldings, Carpeting and Pads, Linoleum, Cable Outlets, Internet Ports, Smoke Detectors, Security Systems, Security Doors, Space Heaters, Window Air Conditioners, Landscaping, Fencing, Irrigation Systems, Driveways, Sidewalks, In-Ground Swimming Pools, Covered Parking, Handicap Accessibility, Water Heaters, and more.

If you own real estate, you probably know that the holdings can be depreciated over 27.5 years for residential property, and 39 years for commercial property. You might even know that there are items in or on the property that can be separated out and depreciated over 5, 7 or 15 years. In 1986, Congress eliminated the Investment Tax Credit and increased the depreciation time for buildings. Since this decreased deductions for taxpayers, accounting firms thought of separating out the components of buildings that had shorter depreciable lives. In the beginning, because of the lack of protocol and expense of the reports and their defense, cost segregation was feasible only for very large holdings.

In the early stages, the IRS did not agree with cost segregation and contested it in many court cases. The turning point was the case in 1997-99 against Hospital Corporation of America, which the IRS lost. Shortly after that, the IRS issued Chief Counsel Advice 199921045 and laid the officially recognized groundwork for cost segregation. Now, the government recognizes cost segregation as a legitimate strategy to encourage business development. There are two IRS publications regarding cost segregation:

* Publication 946, How To Depreciate Property
* Cost Segregation Audit Techniques Guide

It usually takes time for new information to be disseminated. For example, it took many years before 1031 exchanges became readily accepted and available. It takes time for protocols to be established and challenged, and for enough professionals to get educated. Additionally, it was only very recently that companies have been able to efficiently offer chattel valuations, making it affordable for properties with a cost of as low as $50,000. In the past, the report itself could cost more than that.

The IRS recommends that owners who break out these items on their tax returns, obtain a cost segregation study from an independent third party. Without a properly compiled and documented report by an independent, third party, you cannot safely receive all of the tax savings available to you.

You can claim for previous tax years not accounted for, or "catch up depreciation". For tax years 2003 on, taxpayers are allowed to apply a cost segregation study to a prior year without IRS consent. If a taxpayer has filed only one tax return for a specific property, filing IRS Form 3115 (“Application for Change in Accounting Method”) provides an “automatic change” in the depreciation schedule; taxpayers can claim re-configured depreciation without filing an amended return. The IRS has reported that filing a Form 3115 is not a red flag for an audit.

Instructions for Form 3115:
http://www.irs.gov/instructions/i3115/ch01.html

Form 3115:
http://www.irs.gov/pub/irs-pdf/f3115.pdf

If you have filed 2 years or more of returns on your property, you or your accountant must file Form 3115 and then a Section 481 Adjustment. Please contact your CPA or tax attorney for your individual situation.

Under IRS code 167(a) the IRS allow a reasonable allowance for a deduction, over time, for the cost of capital or income earning assets. Code Sections 38 and 168 and Revenue Procedure 87-56 later clarified by Revenue Procedure 88-22, provides guidance on the life of a given object that is depreciable. No Federal or state tax advice is provided. You should seek professional tax advice from your tax advisor with respect to your transaction or matter in order to receive tax advice that is based on your particular circumstance.