A cost segregation study is a little-known method of lowering your income tax bill. Cost segregation accelerates the depreciation on certain aspects of your property. The benefit is in reducing your tax liability and thereby providing a greater source of upfront cash flow.
The most important thing, about a cost segregation study, is knowing it exists. Learn everything you need to know about cost segregation and how it can lower your income tax liability. And, find out why most people don’t know it exists.
Using a Cost Segregation Study to Reduce Property Tax Liability
Cost segregation study is used in tax planning for real estate investors and property developers. As a commercial real estate investor, it is beneficial to accelerate the depreciation of different components of a property. This allows an investor to offset their tax liability by getting more of a deduction in the same year as a large purchase.
In essence, a cost segregation study looks at all the things that make up a property and puts them – or ‘segregates’ them – into categories. For example, the property as a whole depreciates over 39 years, so it will take 39 years to receive your total deduction. But, a cost segregation study identifies all of the individual assets within a property, which depreciates on a much faster basis.
How Segregating Property Assets Reduces Your Cost Basis
Pretend your business recently made a purchase of an expensive piece of real estate. In terms of real estate depreciation, your tax liability falls into two categories: land, and real property. Normally, the real property carries a useful life of 39 years, and the land does not depreciate in value.
But, that’s where a cost segregation study (CSS) steps-in to split your real property into different sized buckets. The IRS depreciation timeline is different for each bucket, and all the buckets are less than 39 years. So, instead of wrapping the real property into one big bundle, cost segregation separates out elements of your property, like windows, the roof, landscaping, carpeting, doors, and furnishings.
Imagine, that the expensive building your business recently purchased comes with furnishings. Anything that came with the purchase of the property can be segregated in order to expense faster. So, instead of getting a straight line deduction over 39 years, you get a much larger deduction over the first few years, by segregating out the separate costs.
Why is Getting a Cost Segregation Study a Good Idea?
A CSS allows your business to grow its net-worth, faster, by freeing up money for an investment that would otherwise be going to the IRS. Generally, the CSS takes around 20% to 30% of the cost basis of the property and puts it into categories that depreciate at 15 years or less. Some categories can be expensed even faster, taking your timeline of 39 years and reducing a big chunk down to 15, 7, 5, and 3-year depreciation schedules.
Your tax planner can use the CSS to take 179 and Bonus depreciation, fully expensing the cost basis of your property in the first year. That means you can make a big property purchase, and claim very little in the way of tax liability.
Talk to a Tax Planner
For many residential and commercial property owners, cost segregation means you can pay fewer taxes on 20% to 30% of your real estate. So, if you’re interested, talk to a tax professional, accountant, or CPA.
If you want to find out if your real estate would benefit from a cost segregation study, talk to a tax planner today. And, share this article with your social media community to help others understand how to make the best of real estate tax planning.