Types of Cost Segregation Studies
Engineering-based vs Residual-based
 
 

RESIDUAL: The residual Cost Segregation method is an abbreviated estimation method in which only short-lived asset costs (e.g. 5- or 7-year property) are identified and estimated.  Long- lived asset costs (e.g. 27.5- or 39-year property) are not included in the study.

Short-lived asset costs are added together and then subtracted from the Total Project Cost.  The remaining or “residual” cost is then simply assigned to the building and/or other long-lived assets.
 
Although this method is simple and less time consuming than the Engineering Cost Segregation method, it can also be less accurate.
 
It should be recognized that this method generally does not reconcile project costs. In general, residual costs are not estimated or checked for reasonableness. A proper and “reasonable” residual costs should always be determined and then added back to the total of all short-lived asset costs to check if that total project cost is reconciled.

The Residual Estimation Approach generally results in substantial LESS tax benefits for the taxpayer because, in practice, such estimates are more conservative and therefore, are less likely to result in less tax benefits for property owners – perhaps as high as 20% - 50% LESS benefits.
 
ENGINEERING: by contrast the Engineering method relies on solid documentation and utilizes construction –based documents such as blueprints, specifications, contracts, job reports, change orders, payment request, invoices, appraisals, etc. When estimates are required, they are based on costing data, either from contractors or from reliable published (e.g. R.S. Means or Marshall Valuation Service).
 
The sources of estimating data are clearly referenced, including identification of the specific volume, page, and item number.  Further, the same estimating techniques and unit cost data sources are used for all of the items that comprise the actual cost.

The Engineering method of Cost Segregation typically produces significantly HIGHER tax benefits for property owners than the Residual methodology.

WHY:  Residual can sometimes be cheaper (because of less experienced personnel and detail covered), and sometimes Faster....but it brings you LESS (tax benefits and protection)

WHY US: Engineering is about “details” and details are what makes a study defensible with the IRS…and that is what matters!!!   We do not sell people problems…and a non-defensible product is a PROBLEM!