What is Cost Segregation and How Can It Help You?

Income tax season can be rough on everyone, but it’s particularly complicated for commercial or residential real estate owners. Thanks to a system of complicated procedures, it is possible to classify various real estate holdings according to their most tax-friendly status. For example, reallocating a real property to personal property can allow for substantially shorter depreciation times and therefore an accelerated depreciation method.

We call this cost segregation, and it’s essentially the process of identifying various assets and their costs, and classifying them according to the most beneficial federal income tax status. For example, a commercial building with a 39-year depreciable life, or a residential building with a 27.5-year depreciable life could be reclassified as personal property or a land improvement. Now that asset could boast a 5, 7, or 15-year rate of depreciation.

Using an engineering-based study, a building owner can depreciate that property in the shortest time period allowed by tax laws.

Benefits of a Cost Segregation can include:

  • Reduction in current income tax liability
  • Deferral of taxes
  • Ability to claim missed depreciation deductions from prior years (without having to file amended returns)
  • Immediate boost in cash flow

What’s the catch? In order to perform a cost segregation, the IRS requires that an engineering-based study be performed. The study allows all building components, such as electrical, mechanical, and plumbing systems to be reclassed into shorter-lived asset classes. This lends the CPA the information needed to meet strict regulations and requirements.

Why perform cost segregation? Have you heard the old phrase, “A dollar today is worth more than a dollar tomorrow”? We can apply that same principle to tax deductions. The money you free up from taxes this year, can be applied to other investments.

Virtually all commercial real estate owners can benefit from cost segregation. Give us a call and speak to our real estate attorney, and we can explain more about how this strategy can benefit you.


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