As a property owner, you already know about the three-word phrase that gets uttered to everyone in real estate: location, location, location. Don’t get me wrong, location is important, but what about locating additional tax savings?
Enter cost segregation.
This under-the-radar tax deferral strategy can save property owners thousands of dollars by allowing them to accelerate depreciation and take advantage of deductions in the early years of property ownership.
There is one factor that often keeps business owners reluctant to consider this strategy, and that is the need for a cost segregation study. It sounds onerous, so business owners put the brakes on the idea…which leaves money on the table.
So, let’s get some facts straight. The main purpose of conducting a study is to identify all costs within the property that can be depreciated quicker — and to break down the property into four different categories:
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- Personal property
- Land improvements
- Building
- Land
Any part of the property that falls under personal property or land improvements may qualify for shorter useful lives, meaning their depreciation may be able to be accelerated.
Assets that fall under personal property are generally classified under a 5–7 year recovery timeframe. Land improvements generally fall under a 15-year timeframe. This would allow for significant deductions much sooner than the standard depreciation period of 27.5 or 39 years that most properties are subject to!
Side note: The assets that qualify for accelerated depreciation may also qualify for bonus depreciation and additional benefits under Section 179.
Any time there’s a strategy allowing you and the business to save money on taxes, it sounds like a good deal — and in this case, it is. With cost segregation, you can get the benefit of the tax deductions, leaving you with more money to reinvest in the business or take out as profit.
Tax Strategy: Cost Segregation
Real estate owners with properties valued over $500,000 may benefit from participating in a cost segregation study. Those studies are often conducted by engineering consulting firms that specialize in cost segregation analysis to identify and take advantage of any tax-saving opportunities.
Advantages:
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- Can lower prior, current, and/or future year’s taxable income
- Completing a cost segregation study may reveal other cost-saving opportunities
Caution:
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- Can be challenged by an IRS audit
- When assets are sold, they can be subject to depreciation recapture
- Must keep detailed records of segregation study
Savings Range:
$10,000 – $100,000+
Good Business: Cost Segregation Study
Though the impact of cost segregation varies depending on many factors, taking advantage of it can provide property owners with significant tax savings for many years.
A note on timing: Cost segregation studies are best done in the first year of ownership, which allows you to take advantage of properly classifying any improvements that the property needs. Cost segregation studies can take anywhere from one to three months to complete and must be completed by an individual or a firm that has experience with cost segregation.
The cost of studies varies depending on how long the project is estimated to take. Some of the variables that may impact the length of time are the size of the property, location, number of tenants, as well as the uniqueness of the building structure.
Determining if cost segregation makes sense for you can be challenging. Here at Tremonte, we can help you figure out if your situation and property would benefit from completing a study. Reach out to a member of our team today!
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