Cost Segregation is a strategy for increasing cash flow and reducing income taxes for commercial & residential property used in a trade or business. The tax benefits of cost segregations can be applied to real estates like hotels, restaurants, office spaces, apartments, auto dealerships, manufacturing, retail centers, and more.
Investing in a cost segregation study may allow your business to accelerate depreciation deductions on certain items.
What is a Cost Segregation Study?
The owner of real estate can take allowable depreciation deductions. These deductions are spread across the assumed useful life of the asset, which is generally 27.5 years for residential real estate, and 39 years for non-residential real estate.
Real estate comes in all shapes and sizes and is so much more than an asset. Most structures include components that help the occupant run their business more efficiently and effectively. Some of these components can be written off more quickly. A cost segregation study will help you determine what components can be written off and how you can boost your tax savings on those properties.
A quality cost segregation study will analyze all information (including inspections, interviews and available records) and present the analysis in a clear, well-documented format.
When Should a Cost Segregation Study Be Done?
A cost segregation study can take place any time after the purchase, renovation, or construction of a property. Most cost segregation studies are done in the year the building is purchased, constructed or remodeled. A “lookback” study can also be performed on an asset that has been place in service in a prior year. These results are implemented by filing an Accounting Method Change Form 3115.
The Goal of a Cost Segregation Study
The main goal of a cost segregation study is to identify all personal property and land improvements with an allowable recovery period of 5, 7, and 15 years. By accelerating the depreciation deduction of specific properties. Owners can use these deductions to drive down current tax liability resulting in increased cash flow
Cost Segregation Studies and Saving Money
Cost segregation studies are a tool to get money out of an investment quickly. With a cost segregation study you are able to divide your purchase price into groups of items with faster depreciation deductions. Cost segregation studies will give you short-term cash flow, as you are paying less in taxes.
On average, cost segregation studies re-class 20%-40% of the building basis into “short life” assets (20 years or less). Some of the factors that determine whether a cost segregation study will be helpful to your business include:
- What is your tax rate?
- How much did it cost?
- What is your business?
- How long will you own this asset?
While cost segregation studies have their own costs the potential long-term tax benefits make the process a worthy investment for property owners. To learn more, contact Craig Chase at Craig.Chase@reacpa.com.
By: Craig Chase (Wooster office)