Cost segregation is advantageous for a property owner when it comes to tax liability and deductions. It is a strategic tax planning tool that accelerates depreciation deductions while deferring taxes on a property. By shortening the deduction time on assets related to a property, a property owner can save more money upfront, increasing their cash flow.
WHAT DOES A COST SEGREGATION STUDY DO?
There are varying periods of depreciation based on property types, as well as varying components of a property. For example, a rental property generally depreciates over a 27.5 year timeline, whereas a commercial property roughly depreciates over 39 years.
Components of real estate fall into tax categories that typically have much quicker timelines for tax-writeoff purposes. There are many costs that go into the upkeep of a property, such as additions made like fencing, interior fixtures, and landscaping. These property-related costs can be depreciated at periods of about five, seven and fifteen years. By identifying what these costs are and their values, an owner can establish their depreciation value and reduce their respective tax liability according to each asset.
The objective of a cost segregation study is to categorize different property-related costs into appropriate classes so that depreciation benefits can be maximized. Essentially, you want to analyze how each component can be valued from a tax standpoint, and how you can reduce tax liability according to each.
WHY ARE THESE STUDIES IMPORTANT?
By acquiring a cost segregation study, one can maximize the amount of depreciation deductions by dividing the costs of investments made into a building. This is ultimately beneficial in saving a property owner from tax liability while increasing their cash flow.
A cost segregation study also presents the opportunity to reclaim past depreciation deductions. As per current IRS rules, a property owner may account for depreciation made in previous years within the current tax year, without having to file an amended tax return. Due to this fact, it is favorable to conduct a cost segregation study even years after property acquisition!
Furthermore, new tax reform such as “bonus depreciation” has become increasingly significant in determining tax liability. Bonus depreciation is now available at a rate of 100% for both acquired and new construction of properties, making cost segregation studies even more impactful for new owners.
WHO SHOULD CONSIDER A COST SEGREGATION STUDY?
An individual who is planning to, or has recently acquired a new property, should consider if a cost segregation study is right for them. Depending on their goals with the property, this study can save both time and thousands in potential financial costs. It is beneficial to have a study conducted when renovations or investments are made into the property upfront or planned in the upcoming years.
WHO PERFORMS THESE STUDIES?
Due to the complexity of the tax rules and accounting associated with the property costs, the study should be performed by a firm that specializes in these matters. The potential net benefits in tax reductions alone outweigh the cost of such a study to be conducted.
EXAMPLES OF COST SEGREGATION
How would a real estate investor realistically use cost segregation? Say an investor wants to purchase a commercial property at $1,200,000. Typically, an owner would treat the property components similarly and depreciate the entire property at the same rate.
In a case like this, a real estate investor can utilize a cost segregation study to separate the components of the land—including land improvements, new roofing, air systems, etc.—and treat these components based on different depreciation rates.
Cost segregation is also beneficial in lowering one’s taxes. A property owner might undergo structural changes to the property, such as new additions or renovations. In a proper cost segregation assessment, leftover materials may qualify as tax-deductible to the owner. Placing any of these additional costs into shorter life assets with ultimately reduce tax liability, saving you on your tax returns each year.
COST SEGREGATION AVAILABLE SERVICES
There are differing options in where you can obtain a cost segregation study, depending on your property type and what you’re looking for. In order to get what’s best for you, first reach out with a financial advisor in regards to your options.
Cost Segregation is a tool that is avidly used by investors at White Sand Capital, saving them thousands on their property taxes—want to join them?
Get started investing with the top real estate investment team in Hawaii.
