Does my ranch qualify for Cost Segregation and what is it?
1. Tax Strategy
A Cost Segregation Study is a strategic, IRS-approved tax-saving tool. Cost segregation can be used by those who have constructed, purchased, expanded, or improved any kind of commercial real estate including ranches and farms. The study allows the ranch owner to take advantage of accelerated depreciation deductions and defer federal and state income taxes. Cost segregation uses IRS Modified Accelerated Cost Recovery System method of depreciation. MACRS is the acronym commonly used. Ranches have 9 categories of depreciation under this system ranging from 3 years to 25 years. It identifies what ranch property can be depreciated.
2. Cost Segregation Process
The cost segregation process for your ranch is simple. An engineer conducts a site survey of your ranch. While there, pictures are taken of the ranch and measurements made to substantiate assets for the IRS. We review your ranch closing documents, appraisal, construction drawings & invoices, current depreciation schedule, and site plan. All information about your ranch is kept confidential. We break out all assets using the IRS Cost Segregation Audit Techniques Guide. Using MACRS we then classify each individual asset on your ranch according to those IRS guidelines.
3. Will My Ranch Qualify and Why?
Cost segregation applied to a ranch or large farm is different from when applied to, say, an office building or restaurant. By different I mean there are factors specific to a ranch, not applicable to an office building. There is more to consider on the ranch or farm land itself. Land Improvements qualify for 15-year depreciation. These “land improvements” to the site would include privately built roads, fences, gates, security, electrical wiring, pumps and wells, irrigation systems, to name a few. Depending on circumstances, dams, ponds, and terraces would qualify. Of course, the land itself can never be depreciated. IRS Publication 225, Farmer’s Tax Guide, devotes almost 3 full pages to Depreciation, Depletion, and Amortization to farms and ranches.
Buildings contain assets called “tangible personal property” and these qualify for 5-year accelerated depreciation. Examples of these assets are millwork, cabinetry, dedicated plumbing or electrical, carpeting and certain flooring, security/communications, secondary systems (e.g. backup power generator), to name a few.
4. What is Accelerated Depreciation?
Accelerated depreciation is the result of applying cost segregation. The assets we discussed above qualify to be reallocated from long-term depreciation periods (20 & 25 years) to short-term (5, 7 & 15 years). You already know what that means to your income taxes. It reduces them substantially. You keep more of your hard-earned money in your pocket. A ranch always needs a fence mended or well-pump repaired.
5. What Does it Cost?
Great question! A cost segregation study for a ranch will vary significantly according to it’s size and degree of improvements. Segregation Holding LLC is unique in how we deliver a cost segregation report. Our fees come with a guarantee. Our guarantee states “For projects over $500,000, we guarantee a minimum of 5 times the cost of our fee.” To date we have never been close. We regularly exceed 1000% ROIs, income tax credit vs. our professional fee.
SHLLC provides any ranch owner with a free, no obligation benchmark estimate. We have a simple client questionnaire. Armed with this information we can tell you how much you have overpaid your income taxes. We recommend taking our benchmark to your CPA. Discuss the merits of accelerated depreciation and how it will affect your personal tax situation. We can also file the appropriate forms with the IRS to get it back for you…at no charge.
To learn more about professional ranch enhancement and development strategies, contact Austin Rector, President of Stoa Management. His web address is www.StoaManagement.com. Or email him at A[email protected]. Have a question for him now? Call 406.579.4914.
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