Heidi Henderson: 00:10

Hello, everyone. This is Heidi Henderson. So here's the question for today. If you have ever been quoted to wildly different prices for a cost segregation study and you have wondered, isn't this all the same thing? Well, you're not alone.

Heidi Henderson: 00:26

And so today, I'm going to show you why that assumption could cost you tens of thousands, if not hundreds of thousands of dollars, and potentially put your entire tax position at risk. Welcome to Slash Tax. I am Heidi Henderson, the CMO and a tax strategist with Engineered Tax Services. This episode's a little bit different. Today, it's just me, and I'm gonna get really deep.

Heidi Henderson: 00:52

We're gonna go into the weeds on a topic that I believe every real estate investor, CPA, and adviser really needs to understand. What actually defines a quality cost segregation study? Because the truth is, and nobody's talking about it, cost segregation is not a product. It is not standardized, and it is definitely not a commodity. Two providers can use the exact same term, but what they deliver is completely different, and the results are different.

Heidi Henderson: 01:26

Different levels of documentation, very different levels of audit protection. And the IRS, they've actually told us this. There are no formal requirements. There is no universal standard, and yet every single deduction still has to be substantiated. And so what does that mean for you?

Heidi Henderson: 01:47

It means that the burden falls on you as the taxpayer to understand what you are actually getting, what you're actually paying for. In this episode, I'm gonna walk you through what the IRS audit technique guidelines actually say, the real differences between an engineering based study and a basic report, the red flags that most investors often miss, and how technology, AI, and automation are kinda changing the space for the better and for the worst. Because this isn't just about saving money in one year, it's about building a tax position that's going to follow you for the life of this property and making sure that it holds up no matter what. So with that, let's get into it. What your cost segregation report is not telling you, and why the cost segregation provider you choose can make or break your investment.

Heidi Henderson: 02:44

Now I will preface this that I am sharing slides today. I understand if you are listening to this podcast, I'm gonna do my best to walk through what is on these slides. However, you may find it useful to find this episode on video. It will be on YouTube. It is also on video via Spotify.

Heidi Henderson: 03:02

We will have it on our website at engineeredtaxservices.com/taxpodcast.com. I will put links in the show notes, and I will actually share a PDF of this slide deck as well if you would like to refer to it. So if you're listening, just FYI, there will be slides for this presentation. So here's the problem that no one talks about. Cost segregation does not divine a specific deliverable.

Heidi Henderson: 03:30

It is actually a concept. So two reports can carry the same name while they're delivering completely different levels of detail, benefit, and audit protection. You can have one report that has 45 pages. It's very detailed. It's a quality engineering report, 100 components that are just built out into the whole thing.

Heidi Henderson: 03:53

A fully detailed study typically has more reclassification, more benefit on the reclass side than what you're gonna see with a simplified type of a study. And so we're gonna dive into ultimately what those differences are so that you as a consumer can understand what it is that you're actually buying or what you're seeing when you're getting a proposal for a cost seg study. What I wanna do is lay the groundwork first. I warned you. We'll get into the weeds a little bit in this episode.

Heidi Henderson: 04:23

But I wanna get into the weeds first with how the IRS defines cost segregation. There is a document called the IRS ATGs, audit technique guidelines for cost segregation. They have some specific items outlined within these ATG guidelines. First off, they say there are actually six different ways that cost segregation studies can be performed. So the methodologies behind how the study is done.

Heidi Henderson: 04:54

One, a detailed engineering approach from actual cost records. That's gonna be new construction. So we're actually looking at the numbers. And number two is a detailed engineering cost estimate approach. That's where it's an engineering study based on buying an existing building.

Heidi Henderson: 05:11

The third is a survey or a letter approach, very high level like an appraisal. Number four is a residual estimation approach. Number five is sampling or model approach. We actually at Engineered Tax Services have deployed this method on rare occasion that if we're doing massive portfolios, let's say a thousand single family rental properties or something with very similar units, this can be used in those type of scenarios sometimes. And then number six, a rule of thumb approach.

Heidi Henderson: 05:42

These are definitions of types of cost segregation studies outlined in the ATGs. So I think most people don't understand when you're shopping for a cost segregation study, the thought is that cost seg is just cost seg, right? That's that's what it is. It's just a thing. But in actuality, it is very broad definition that is explaining a concept or a methodology that is based on accounting principles.

Heidi Henderson: 06:11

When we look at quality, a quality cost seg study, typically, when we're looking at it, the this ATG has 268 pages of technical content defining cost seg studies. So this is an IRS document, 268 pages, that explains what is a quality cost segregation study. They have these six options. There are no specific requirements, but these are kind of sort of six methodologies that you might see in the space. And this initial private letter ruling was actually drafted in 1979.

Heidi Henderson: 06:49

So I also wanna drill this home that cost segregation is not new. This has been around for a very, very long time. Because of bonus depreciation, a lot of people think that this is new. And bonus depreciation just simply gave us, like, a steroid injection and just made it that much more valuable. But the principle itself has been around a very long time, and it is very very applicable and practicable.

Heidi Henderson: 07:17

But again, we really need to understand what exactly is it that we're buying and how do we define it. The key audit technique guidelines, I'm gonna refer to them as ATGs, they're about as clear as mud. So I have a number of quotes. I took snippets in my slides if you choose to watch this by video. There are actually definitions in there that show you what page and what paragraph they refer to.

Heidi Henderson: 07:43

So if you wanna pull this up, by all means, go pull up the ATGs. But these are really important definitions, I think, that lays the groundwork for understanding why it's not clear that cost seg is just simply this this commodity thing that you're getting. So number one, one of the first phrases in the beginning of the ATGs, it says, neither the the internal revenue service nor any group or association of practitioners has established any requirement or standards for the preparation of cost segregation studies. The courts have addressed component depreciation, So, they address how depreciation is handled but there is no standard definition of cost segregation studies. I think that's very important to understand that the IRS does not have a firm definition for that.

Heidi Henderson: 08:37

A few kind of the next paragraph, it says, we want to emphasize that the determination of twelve forty five property, that is personal property. That's what we're moving out and accelerating through cost segregation is factually intensive, and it must be supported by corroborating evidence and then goes on to say that this is underlying assumption that it is performed by qualified, quote, unquote, qualified individuals and professional firms that are competent in design, construction, auditing, and estimating procedures. The next paragraph says, despite the lack of specific requirements for preparing cost segregation studies, taxpayers still must substantiate their depreciation deductions and the classifications of their properties. So again, what the IRS typically says, the onus is on the taxpayer. What that means is what you buy and what you file on your tax return is your responsibility and you ultimately have to answer for it.

Heidi Henderson: 09:40

Paragraph four says 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 that produce more accurate and reliable allocations. From there, beyond this page, this is page 22 of Bacon, 268 page document. Then, it goes on to say, the ATGs state 14 points that define a quote unquote quality cost segregation study. So, although they have not defined exactly what a cost seg is, they certainly have given us parameters for what defines a quality study.

Heidi Henderson: 10:28

Again, I'll kind of apologize because we're getting we're getting deep here. But going into the weeds, I really want to share what it is that the IRS outlines. After I go through these, we'll kind of we'll we'll drill it. We'll dial it back up a little bit, and I'll bring back to how this actually applies to you as a property owner, as an investor, or a taxpayer. But, again, this methodology is so vital to understanding what you're getting.

Heidi Henderson: 10:54

So the IRS has defined 13 principal elements of a quality cost segregation study. The ATG guidelines specifically state these 14 things. I'll read them, so if you're listening to this instead of watching video, then you can see these points on the screen. Number one, it's prepared by an individual with expertise and experience. Number two, a detailed description of the methodology in which the report was completed.

Heidi Henderson: 11:22

Number three, the use of appropriate documentation to actually defend that. Number four, interviews conducted with appropriate parties. Number five, use of a common nomenclature. Number six, use of a standard numbering system. So this has to do with our construction costs and construction categories.

Heidi Henderson: 11:42

Number seven, an explanation of the legal analysis. Eight, determination of the unit costs and the engineering takeoffs. This is really important. The unit costs and engineering takeoffs are different components within the building, not just, you know, flooring, and toilets, but looking at the components or the unit costs of the actual structural components. Number nine, organization of assets into lists or groups.

Heidi Henderson: 12:09

Number 10, reconciliation of total allocated costs to the total actual cost. Number 11, an explanation of the treatment of indirect costs. Number 12, an identification and listing of twelve forty five property, which is this is the accelerated items that we peel out even aside from the structural components. And then finally, the consideration of related aspects. So IRC is the internal revenue code two sixty three, change of accounting method, sampling techniques, ultimately how we're treating these assets and how they're booked for accounting purposes.

Heidi Henderson: 12:47

So those 13 items are what the IRS says we're looking for when we're going to audit a cost seg study, and we are defining what what essentially determines if this is actually a quality study or if it's not. This is a little bit of their framework for what they're using to define that. Now as I peel back a little bit off of the IRS guidance on the ATGs, let's compare two studies side by side. Now I'm gonna be fully transparent. I have a screenshot on the next page.

Heidi Henderson: 13:20

I am not sharing any names, but it is a report that was done by my firm, Engineered Tax Services, and another company in the industry that is performing cost segregation studies. No name to be called out. It was a report that was shared with us, and I think it provides a very interesting comparison of understanding the level of detail that is provided in different types of reports. Essentially, you have two reports, the same property, but you have wildly different results and a wildly different deliverable. So, again, what are you paying for if you are ordering or looking for a cost segregation provider?

Heidi Henderson: 14:03

With an engineering based study, at least with how we handle it from an engineering standpoint, number one, a licensed engineering firm with over 40 pages of detailed reporting and engineering asset details, on-site physical inspections by project engineers, 100 plus individually calculated components, literally minute details of assets you'll see in in Mike's sample. The land value is properly allocated and substantiated. So a discussion of where that land allocation came from. Then 13 court cases and six regulations cited based on case law, court cases, and the methodology used for the report itself. The unit of property analysis is included.

Heidi Henderson: 14:49

There's a corporate seal, a professional certification, and there is an asset or sorry, a partial asset disposition documentation. So we're gonna dive in a little bit to that, which is the acronym is PAD, and that's another whole secondary level of of value achieved through cost segregation. With a basic non engineering report, in looking at at, again, the sample that I'll share with you, it was a building contractor, not an engineer. It was less than 10 pages in total, the entire report, in comparison to 60 pages. There was no site visit performed.

Heidi Henderson: 15:28

There was only an online questionnaire that was asked for data. There is less than 20 generic line items in the entire asset breakdown. The entire definition of items included in the review is less than 20 lines. There was no land allocation made at all that was not considered. There was general boilerplate language only in the report, no unit of property analysis, individual signature only, not a company or professional, and there was no dis there was no disposition addressed or the ability to write off assets when there are future improvements.

Heidi Henderson: 16:06

Let me share with you what that looks like. But first, the number one red flag we see is if there is no land value or that the land value is very low. Now this can happen in the report itself. We've seen that. But more importantly, we see this oftentimes at the initial benefit analysis stage.

Heidi Henderson: 16:27

So when you are going and you are getting bids or you're getting an estimate for a cost segregation study, one of the most common scenarios that we'll see is someone may come back and say, I've got multiple bids, and we see that your estimated tax savings is less than what I'm seeing with some other providers. Now oftentimes, and probably nine times out of 10 when that question or comment comes up, I will ask them, what was used for land value in the benefit analysis or this original upfront estimate that you received? What was the land value that was allocated based on that estimate? This is huge because land is non depreciable. So in this in this case with an engineering study, let's say that you have a total cost of $460,000.

Heidi Henderson: 17:17

You buy the home for $4.60. The land value in this case is 31%. We pull the property tax card. We're gonna look to see what that is. We don't dictate that that's what has to be used, but we pull that as a value.

Heidi Henderson: 17:30

So we want to be very realistic. We want to make sure and educate investors that if you've purchased a property and your land value is higher than average, that is going to reduce your tax benefit or your depreciation, the depreciable basis ultimately because we have to take the land value out. Many many different firms and and analysis that we see will use zero or will use a ten, fifteen, or 20% placeholder. Now nationwide, 20% is kind of an average. So that's not unrealistic.

Heidi Henderson: 18:03

However, if your land value is dramatically different, it will create a massive discrepancy in the benefit that you're going to get. And so that is the number one red flag is look to see what the land value is that is being used in the initial estimate and then secondarily in your final report, and make sure that that's something that's been thoroughly vetted and analyzed. The second red flag is that there is no site visit at all. In a typical engineering study, there is a project engineer that visits the property. Photographs are very specific to the components, the actual assets, the finishes, the equipment within the property.

Heidi Henderson: 18:44

There is a review of as as built blueprints on-site if those are available. There's a reconciliation of the findings against the cost records or against all of the assets actually seen on-site. Interviews with owners, facility managers, and anyone else that's been working on the property, particularly if it was acquired with improvements done after the fact, and then an inspection of the condition and the remaining life of assets because that's a whole another component to the cost segregation is that we are not just simply allocating an amount to what we think the value is particular assets. We have to look at what is the replacement cost value of the asset, but then also factor in what is the remaining life. What is the condition of that asset?

Heidi Henderson: 19:32

There may be carpet in there that originally was X number of dollars per square foot but if it's really old and in terrible condition and we put a full value to that, not based on it being in very poor condition, that is going to inflate, again, inflate your benefit. We wanna capture every dollar amount we can, but we wanna do so in a defendable way that is supported under IRS audit and follows these ATGs. When you look at a at a basic report, what we have seen and what we are seeing more often with the onset of AI and technology and automations and online questionnaires is they are just simple assumptions that are being applied, and they don't follow actual use, actual condition, or actual component or spec sheets for the items that are within your property. So oftentimes in the basic report, we see that there was an online questionnaire with no site visit. The client self reports the property details.

Heidi Henderson: 20:32

So, again, talk about the onus being on the taxpayer if you're putting data in. There's a drop down menu for finished grades, so just simply choosing a few options. No engineering verification, no photographs taken, and no reconciliation of the actual costs. So the IRS ATGs define that quality cost seg study as detailed engineering approach from actual cost records as being the most reliable methodology. Now here are the screenshots that I mentioned.

Heidi Henderson: 21:07

The red flag number three is the lie about engineering. This is a tough one, but I'm gonna be super transparent. Our firm has been in business for twenty five years. And you know what they say? That imitation is the finest form form of flattery, and we do appreciate that.

Heidi Henderson: 21:26

But as we have worked very diligently over the last twenty five years to educate investors and educate the marketplace on cost segregation, what we find is that content and education and details oftentimes get picked up and reused. And we have actually seen that. We have actually seen other firms using our report templates with our own watermarks on them in the background, which is pretty amazing. So you know what? It's good to understand, but to be perfectly transparent, it's not just about relying on the fact that a firm says, we do engineering studies because now we see this quite often that this is used pretty broadly.

Heidi Henderson: 22:15

Yeah. We do full engineering studies. This example that I have on the screen, again, hopefully if you have access to video or you can click on the PDF of the slides, you can review these during the recording or after. But on one side, I have a snippet, a screenshot of an actual report that was sent to us from a competitor. This is the entire breakout of assets in the entire property.

Heidi Henderson: 22:41

It was one page. There were about, I think, there were 40 lines in total. You can see here, read some of these items. Site improvements, which is fifteen year property, totaled $7,250. There is no breakout, no detail, just simply site improvements as one large category.

Heidi Henderson: 23:01

Then other categories include windows, doors, roof coverings, initial partitions, doors, ceiling fans, wall finishes, and then a few other items broken out. There is no detail of the methodology of the engineering behind it and the details of any of the assets specifically. When you look at a detailed engineering approach, which is coming from actual cost records or full replacement value from a database supported by the IRS, On the right side of my screen, you'll actually see an example, and this is a very small snippet of 40 pages of detail that is broken out within a detailed engineering study. And you will see here it is incredibly granular. When you look at the 39 class life, there is a drywall partition of gypsum wallboard.

Heidi Henderson: 23:53

There is 1,528 square feet of drywall for a total of $2,915. This breaks out to every the the weather barrier under the asphalt roof, wood decking, two by 12 wood joists or the framing for the wood decking. There is a building footings. We're looking at concrete finishing, backfill, the forms. It is very, very granular in the detail.

Heidi Henderson: 24:22

Why does this matter? That is the big question. And this is why I feel like this episode is so important from an educational standpoint. I would love to be able to work with every investor out there to do their cost segregation studies. But more importantly, I think that it's important that investors are empowered and understand what they're getting.

Heidi Henderson: 24:43

So ask for a copy or review a copy of a redacted final report and see what the actual detail is that you will be getting after you pay for the report because most people don't understand nor do they see that on the back end until it's too late. And so the difference is 20 light items versus a 100 plus or a thousand engineering components that are broken out between all of those minute details that create the substantiation and the IRS support for all of those details. So the hidden gold mine to this, and this is the secondary factor of why it matters, aside from the fact that having the level of detail, you've got audit support, which is tremendous, but you're actually gonna get a significantly higher tax deduction, twenty, twenty five, 30 plus percent more. So the cost of the study may be slightly higher, oftentimes not even substantially higher, just slightly higher. But the value on the back end, the estimated deduction amount is so exponentially larger that, you know, the ROI difference is dramatic.

Heidi Henderson: 25:55

That is aside from the fact that then the secondary benefit, the whole the the hidden gold mine I have on the slides here is partial asset disposition, and we call this PAD or IRS calls this PAD. When you renovate and remove components so think of your old HVAC system, a water heater, or you change cabinets in your property. You can deduct the remaining undepreciated value of those assets. Only if those components were individually identified in your original study. So let me explain that.

Heidi Henderson: 26:31

You buy a property. Let's say, it's a rental property and you spend $500.00 for it and then, you go in and you need to, you rent it. Let's say you rent it for a year and the water heater goes out. Well, the water heater is considered a structural component. It is not accelerated.

Heidi Henderson: 26:50

It does not qualify for bonus depreciation. And so that water heater is then valued in the cost seg study. That has a value. Let's just say it's a let's say it's valued at $3.00 based on your purchase price. And two years after you buy that property, you you have to replace the water heater.

Heidi Henderson: 27:08

It it fails. Leaks out the bottom. Things gotta go in the dumpster and you have to buy a new one. That new water heater is now a new business expense, or you can add that as a capital expenditure, may be able to deduct sorry, to deduct that again with $1.79. That's another discussion.

Heidi Henderson: 27:28

You have the new cost for a new water heater. But why would you continue to depreciate the old water heater if you've owned it for two years? It is on your depreciation schedule for twenty seven and a half years and you just threw it in the dumpster. So, if you have a detailed cost segregation study that has the value of that water heater in it, you would go back to that study at year two when you just replaced the water heater, capture that amount, and take the remaining deduction for the total value of the water heater, less your two years of depreciation. But it's a twenty seven and a half year component.

Heidi Henderson: 28:08

So, you know, you've got, I don't know, 90 plus percent of the value of that asset remaining for deduction. That is the hidden gold mine in cost segregation in using that for additional deductions. We can capture this windfall of tax benefit by applying a cost seg to your property, your investment property, but ongoing, we see tremendous value with being able to use that as a living, breathing document. This is inventory of everything that you own, everything that exists on-site, and that you are using or utilizing for that particular property. In this case, on the slides, I have got another example here of a base cabinet.

Heidi Henderson: 28:54

In the report, in an engineering study, it's going to show that the upper cabinet was $1,685 in the bathroom. The wall cabinet was 3,834. In a basic report, we typically see the total cabinets as one lump sum. That's it. There's one line total cabinets in the whole property.

Heidi Henderson: 29:13

The problem is, what happens if you remove the the bathroom vanity? You don't have substantiation for the number with which you can then deduct that. And so that is really where you end up losing in the long run. And I also mentioned as we move forward, I mentioned the benefit analysis trap. This is really what we're seeing again in the marketplace is we see that every provider will give you an upfront estimate.

Heidi Henderson: 29:41

They will show you what the estimated tax deduction will be. They will give you a price typically. It's I think almost every provider out there is charging a fixed fee price based on the property. So you know what the cost is to do the study. You have kind of an estimate of what the tax deduction will be based on your cost, your placed in service date, bonus depreciation, other factors.

Heidi Henderson: 30:05

Beware of overpromising for instances where the benefit analysis is gauged at getting you to engage and buy and pay for the study of cost segregation. We oftentimes see that there are firms that will over promise. They will use unusually high reclassification percentages with no supporting methodology behind it. The other one is that we will see them underbid. So very competitive pricing or very low pricing that cannot support real engineering work.

Heidi Henderson: 30:39

And so that should also be a red flag. We then see that oftentimes the report under delivers. The final report does not match the initial benefit estimate. It is significantly lower, and there's much less detail than you may have expected when you went into that agreement with what you thought you were actually buying. And then oftentimes, there's no protection.

Heidi Henderson: 31:01

In many of the AI automation driven groups that we see right now that have really kind of come out of the woodwork over the last five years, we have seen that there is no audit protection. When audited, the report lacks the detail and the defense to defend those deductions. Even if they do have audit support, it doesn't it's not typically an insurance policy to say that if it gets disallowed or you lose those deductions that they're going to give you a refund or they're going to offset the penalties and interest because that is almost never the case. I don't know that any firm is doing that. The firms are just simply saying that if you get audited, there will be someone there to work with the IRS to explain the methodology of the report.

Heidi Henderson: 31:47

It does not protect you against disallowances, rollbacks, or penalties in interest. So be aware of what that audit actually means. So you need to ask, how did you arrive at this estimate? And is it guaranteed? Or where does this come from?

Heidi Henderson: 32:06

Or look at other examples of what results have been for similar properties that might be comparable to what you have. Would you re would would this well, one of the questions, would your report survive an IRS audit? Alright. So in looking at what, again, should be analyzed and understanding the deliverable. A fully detailed engineering report.

Heidi Henderson: 32:30

Was there a site visit completed? Is the land properly separated out? Are the components individually identified and calculated? Are there cited relevant tax law and court cases to support the background and methodology used in the report? Is there professional certification or a seal that is added to the report for substantiation?

Heidi Henderson: 32:51

And does audit support stand up? So in a basic study, we oftentimes see that, no, there was no engineering. No, there was no site visit. No, there was no review of land values. Boilerplate cases, no professional certifications, and audit support voids after a very short period of time.

Heidi Henderson: 33:12

And so these are things to be aware of. We are seeing these firsthand in the market. Again, the reason for doing this particular presentation. When you pay less, you get less. But oftentimes, you lose more.

Heidi Henderson: 33:26

When you're looking at the upfront benefit at a full engineering study, it is not a commodity. It is an analysis that will follow you for the entire life of your property. If it's a commercial property, that is thirty nine years. It will follow you as long as you own the property. You may own it for ten years.

Heidi Henderson: 33:45

You may own it forever, but the cost segregation is setting the depreciation life and the detailed assets for that entire cycle. It's not just year one. We calculate the year one benefit but we're creating a report to substantiate the next forty years and to give you the detail for that inventory so you have that benefit of that pad deduction. So you have that, but the engineering is also going to really identify and generate significantly more depreciation. You know, again, I'd mentioned it a few minutes ago.

Heidi Henderson: 34:20

Typically, 25% more depreciation year one than what you're gonna find in a basic report. It is not that it is more aggressive. It is that getting granular in the in the example that I provided, when we get really granular with the engineering detail, when we get into the electrical systems, we are looking at electrical lines all the way back to the breaker panels. We are looking at the doorknobs and every single light fixture, not just low hanging fruit, not just the toilets and the carpeting and the window coverings. Those are easy enough.

Heidi Henderson: 35:00

But it's really when we dive into the structural components and we begin to piece those out based on IRS guidance that we're able to capture a higher depreciation amount, not because of being aggressive, but because of the detail and the level of review that actually goes into that study. So very important to understand the upfront benefit, and then also understanding the long term value that comes with the partial asset disposition, the cheap report providing zero future depreciation, and no information when you renovate. So five questions to ask before you hire a cost segregation provider. Are you a licensed engineering firm? The IRS ATGs were written around engineering based studies, so they talk a lot about that when they define what is a quality cost cost segregation study.

Heidi Henderson: 35:56

Ask, will you physically visit my property? An online questionnaire can't identify depreciable components. Now I will caveat that that at Engineered Tax Services, on small single family homes, we have adopted the option of doing a virtual site visit, which is by video. This was adopted actually during COVID when IRS actually allowed us to do virtual site visits for energy certifications that we do on commercial buildings. So on smaller, simple properties, that is an option that can really help keep the cost low and still give us the data and the substantiation we need to see every asset in the property to analyze everything that's actually existing there and capture the full benefit of a study.

Heidi Henderson: 36:44

But again, that is done only on very small, simple projects where that would make more sense from a cost standpoint. Otherwise, a physical site visit is done on every single one of our projects. Ask the question, can you show me a sample report? I think if you can look at the video that I've provided or I'll share some details in my show notes, ask for a copy. Look at what is the deliverable that you are actually getting.

Heidi Henderson: 37:11

How many components will you be identifying out of my property? How granular is the detail, and how does that correlate to the depreciation and my ability to claim disposition in the future? And then what happens if I get audited? How far does that go? What does it actually look like?

Heidi Henderson: 37:29

And what am I being covered for? So those are really, really important questions. In addition to understanding the level of detail in these studies, again, not just the immediate benefit, not the process in which it's completed, but the inventory list that you have, the data that comes back to your CPA so that they're able to use the document to apply that into your tax returns seamlessly with support in a way that is intuitive and that they have the detail that they really need to make sure that you're claiming those benefits and capturing everything appropriately. Provider that you choose really matters. The whole reason I wanted to do this episode is specifically because I see these questions.

Heidi Henderson: 38:16

I get these questions almost every single day. I'm seeing more of these options and less clarity in terms of the fact that there is really no standard cost segregation deliverable. It really isn't just one sort of standalone thing. And the audit guidelines really help outline or sort of set the basis for how the IRS views that. We've been in business for twenty five years.

Heidi Henderson: 38:41

We have done we do tens of thousands of studies every single year. We are the only licensed engineering firm in cost segregation. I am so proud of what we have developed in this space and the detail that we provide. I will share you one last case study, and then we'll kind of wrap up. But one example that I want to provide is a very recent discussion that I had with an investor.

Heidi Henderson: 39:06

I had an investor call me last week. They engaged a firm to do cost segregation on a couple of really, really nice medical office facilities. They've bought a few of them in this past year. They engaged the firm, started to go through the process, provided the details for each of the properties, and they started to get some of the data back from the firm that they had hired for their cost segregation study. They immediately recognized that it was not, in fact, a full engineering study, that there was no component depreciation, there was no component breakdown, there was no asset detail listing.

Heidi Henderson: 39:43

It was very high level. And when they began to ask the questions, the provider said, well, you know, that's not necessary. So, they reached out to me. I don't even remember. I think a friend of theirs had referred them.

Heidi Henderson: 39:57

So, they reached out. We had a conversation and they had some very, very detailed questions and saying, look, what is it that you are delivering? What can you show us? What your study looks like? What we're looking for is we really need the detail.

Heidi Henderson: 40:10

We need to know that we can show our investors that we have the proof behind it. We have many investors in our group. We wanna know that it's supported. We wanna know we have the necessary data. So we walked through it, actually shared with them a redacted study of recent study we completed on a very similar project just like theirs.

Heidi Henderson: 40:28

And immediately, they said, you know what? We don't it doesn't even matter that we engaged another firm. We literally are moving over. We're going to pay a full fee for another study. We understand we've lost the cost on that other one but it doesn't matter.

Heidi Henderson: 40:40

Because ultimately we didn't understand what we were actually getting when we engaged this firm. We didn't understand that it was not a full detailed study and that we weren't going to be getting kind of what we had sort of expected to be getting based on the discussions they had up front. So I thought that was fascinating. Again, it is why I'm actually doing this episode because I think that it is becoming more common, and my goal is to simply educate consumers and to help support investors across the country, understanding what is happening, what they're getting, what you're paying for. And so here's the bottom line.

Heidi Henderson: 41:20

Cost segregation is not a line item on your closing checklist. It's not something that you just shop for based on price, and it is definitely not something that you want to get wrong. Because just about it's not just about what happens in just year one. It's about the accuracy of your depreciation. It is about your ability to actually defend that to the IRS.

Heidi Henderson: 41:43

Your ability to capture future deductions with pad, the disposition elections, and ultimately, your exposure if that return is ever reviewed. So, the study you choose becomes part of your tax record. It follows the property. It supports every future deduction and it either gives you confidence or it creates risk. The IRS has made one thing very clear.

Heidi Henderson: 42:06

They are not prescribing how these studies should be done, but they are absolutely evaluating how well they are supported, and that is where the gap is. Because what we're seeing in the market right now, especially with the rise of AI and automation and low cost providers, it's a big shift towards speed and price at the expense of detail, methodology, and defensibility. Technology is powerful. It's amazing. But without the right expertise behind it, it doesn't replace engineering, and it doesn't replace judgment.

Heidi Henderson: 42:42

So it definitely doesn't replace substantiation. So as you evaluate your next property or even review a study that you've already completed, ask yourself these questions. Do I know how this was done? Can it be defended? Will it hold up in five or seven or ten years from now?

Heidi Henderson: 43:03

Because the cheapest study is almost always the most expensive one. When you look at what's missed, what is unsupported, and what your risk is on the back end. With that, if this episode has helped you think a little differently about cost segregation, that is exactly my point. And if you want to go deeper, you want to review a study, or understand what a true engineering based approach looks like, we are here as a resource. I will also drop some links in the show notes for a free property evaluation and a price quote if you want to review a property, get an estimate for yours specifically.

Heidi Henderson: 43:41

Thank you very much for spending this time with me, and we will see you next time on Slash Tax.