We are aware that owners face an unexpected tax burden when selling a commercial or investment property: depreciation recapture. A 1245X study, also called a reverse cost segregation study (CSS), is a custom-specialized tax strategy performed at the time of sale. Its goal is to assign fair market value (FMV) to Section 1245 assets, generally at amounts lower than when they were originally placed in service. This approach can lower or even eliminate depreciation recapture. It simply converts the temporary benefits of a traditional cost segregation study into permanent tax savings.
Unlike traditional cost segregation studies performed during ownership, a 1245X study is completed at the time of sale, providing tax savings at closing instead of temporary deferrals during ownership.
A 1245X study is simply a focused tax analysis that assigns FMV to Section 1245 assets at the moment of sale.
Think of it as the reverse of a standard cost segregation study. Instead of accelerating depreciation deductions early in ownership, a reverse CSS study reallocates asset values at the end, which would have a minimizing influence on tax exposure when selling the property.
A 1245X study, or reverse cost segregation study, is carried out at the time of a property sale to strategically reassign asset values and reduce depreciation recapture. The process is well-structured and fully compliant with IRS standards to establish full precision as well as defensible results:
The IRS defines Section 1245 property as specific types of depreciable personal property that are generally part of a commercial or investment property sale. Such assets include in general:
Because Section 1245 assets depreciate at a faster rate than the building’s structure, they are naturally subject to higher depreciation recapture taxes at the time of sale. This makes them the primary focus of a reverse CSS.
By accurately establishing FMV for such assets during the study, property owners are able to significantly reduce or eliminate depreciation recapture.
By focusing on Section 1245 assets, reverse cost segregation study process presents assistance to property owners in preventing costly taxation surprises and achieving lasting savings. Advantages of 1245X Study can be outlined as follows:
A well-executed 1245X study gives property owners confidence along with clarity. It also makes sure that they keep more of their proceeds when exiting an investment.
It is true that both cost segregation and 1245X studies analyze asset values. Yet, their timing, goals, and results are very different.
| Feature | Cost Segregation Study | 1245X Study (Reverse CSS) |
|---|---|---|
| Timing | During ownership (construction, acquisition, or renovation) | At the time of property sale |
| Goal | Accelerate depreciation for short-term cash flow | Strategically assign lower FMV to Section 1245 assets to minimize or eliminate depreciation recapture and make prior tax deferrals permanent |
| Outcome | Temporary tax deferral | Tax savings at the time of sale through defensible FMV allocations |
| Scope | Entire building components | Focus on Section 1245 components while also documenting allocations among land, Section 1250 building, and Section 1245 property |
In short:
This strategy is ideal for the groups as presented below:
It should be realized that selling a property without a 1245X study generally results in unnecessary tax costs due to depreciation recapture. By planning ahead, it is completely possible to reduce such liability and increase your net proceeds at closing.
Results depend on actual FMVs and IRS reporting requirements. It is true that the results vary in line with the valuations and IRS reporting. Yet, a reverse CSS offers a defensible, IRS-compliant strategy that generally reduces or fully eliminates depreciation recapture.
At Dimov Tax, our dedicated team presents comprehensive 1245X study services, including valuation and documentation as well as IRS-compliant reporting. Our experts focus on Section 1245 assets to structure the sale in a way that achieves maximum savings and establishes full compliance with regulations. Contact Dimov Tax to learn how a 1245X study can help you minimize depreciation recapture and secure major tax savings at the time of sale.
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