HOUSTON—Patrick O'Connor is founder and president of Houston-based O'Connor and Associates and Enriched Data. In the first part of this interview, he shared some insights into commercial real estate data and how quality data can be beneficial in sourcing sites and researching development opportunities. In the second part of this exclusive, O'Connor discusses cost segregation.

GlobeSt.com: What is cost segregation?

O'Connor: Most real estate investors pay more income taxes than appropriate. Cost segregation is an IRS-approved way of reducing income taxes by increasing depreciation.

GlobeSt.com: Is cost segregation expensive?

O'Connor: Our reasonable fees typically provide clients a 500 to 2,000% return in the first year.

GlobeSt.com: Is it safe to assume most real estate investors use cost segregation?

O'Connor: Sadly no; even though cost segregation has been available for 15 years, it is not well understood by many owners and some income tax preparers.

GlobeSt.com: Is it not used because of audit risk?

O'Connor: The problem is not all tax preparers recommend cost segregation, and most investors don't understand it. After preparing more than 5,000 cost segregation reports over 15 years, our studies have only been questioned by the IRS about 15 times. Those clients were under routine audit and the IRS did not request changes for any of them. If investors are not using cost segregation, they need to visit with a handful of tax preparers to get a balanced perspective.

GlobeSt.com: Why the hesitancy to use cost segregation?

O'Connor: There are several reasons tax preparers do not offer cost segregation: 1) they are often uninformed about the benefits and 2) many tax preparers are more concerned with compliance and not as focused on strategy. This is understandable, but does not always best serve the real estate investor. The solution is real estate investors need to do their own research and drive the focus on tax strategy, both on the web and by speaking to other tax preparers.

GlobeSt.com: What are the misconceptions about the benefits?

O'Connor: The primary misconception is that cost segregation only defers income taxes. Consulting with a variety of CPAs will confirm that cost segregation both reduces and defers state and federal income taxes.

GlobeSt.com: What is involved in the process?

O'Connor: We prepare a complimentary analysis that provides a good estimate of the benefits. The analysis provides both the cost and savings over one and five years, and a summary of what happens if the property is sold.

It is recommended that investors consult with financial and tax advisors before embarking on any tax strategies.

Instant Insights /

What are the Benefits of Cost Segregation?

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