Cost segregation is a tax-reducing strategy that can help for-profit businesses that may have bought, built, updated, or expanded real estate investments. Cost segregation offers many financial advantages. It can help businesses claim more depreciation deductions, defer state and federal income taxes, and even reduce their overall tax bills.
By accelerating depreciation deductions, a cost segregation study carried out on investment property has the potential to save you thousands of dollars. However, cost segregation studies are often expensive and may not be worthwhile for real estate properties that fall under a certain value. Let’s take a closer look at the benefits and disadvantages of this tax-saving strategy:
5 Cost Segregation Real Estate Tips
A cost segregation study can be carried out on residential real estate that’s considered investment property, but not a personal residence. Cost segregation allocates any property-related expenses into their appropriate categories or classes. This allows businesses to take advantage of depreciation deductions and reduce their overall tax burden.
Are you unsure if a cost segregation study is right for your business? The following tips can help you decide:
1. Cost segregation can help businesses minimize taxable income from renovations, construction, and more.
Analyzing costs spent on property renovations, construction, the purchase of necessary materials, and structural improvements will likely minimize taxable income. This means less of your money will go toward paying local, state, and federal taxes.
2. A cost segregation study shortens the depreciation schedule range from 27.5-39 years to 5-15 years.
Depreciation schedules generally allow for real estate depreciation over a 27.5- or 39-year period. Accelerated depreciation deductions allow you to depreciate certain assets or elements in five, seven, or 15 years. This can result in substantial savings for commercial property owners.
3. A cost segregation study can be expensive, depending on the property.
A quality cost segregation study isn’t cheap, ranging from $10,000-$25,000. However, the total cost will vary depending on the property’s location, age, property type, and the time it takes to carry out the analysis. That’s why it’s best to work with experienced tax professionals who can help you weigh the pros and cons of conducting a cost segregation study on your commercial real estate property.
4. Only certain types of real estate assets qualify.
Eligible personal real estate assets include items that aren’t deemed necessary for a building’s overall operation and maintenance. This includes furniture, home appliances, equipment, and vehicles. Additionally, land improvement deductions for tax purposes may include parking lots, walkways, fencing, driveways, and landscaping. According to the IRS, under cost segregation tax law, you can separate landscape elements into various parts, such as security lighting, plants, and trees.
5. Certain assets may qualify for bonus depreciation.
This tax incentive allows businesses to deduct a larger percentage of the total cost of eligible assets immediately. Also known as the additional first-year depreciation deduction, bonus depreciation was created to encourage small business investments.
To qualify for 30, 50, or 100 percent bonus depreciation, business assets are required to meet specific standards. Eligible expenses can be used for business or personal reasons and must have a maximum useful life of 20 years. They should also meet the following criteria:
- The asset wasn’t previously owned by a controlled corporation group.
- The asset qualifies as a modified accelerated cost recovery system (MACRS) property with a recovery period of 20 years or less.
- The assets are classified as indirect construction costs unrelated to the building’s overall value. This may include architectural fees, trash collection, building appraisals, and construction management.
- The asset is considered a qualified leasehold improvement property. This means that acquisition requirements and placed-in-service dates must be met to qualify for 30, 50, or 100 percent bonus depreciation.
Cost Segregation and Real Estate: Is It Worth It?
Cost segregation may not be the right strategy for every property. However, it can save you thousands of dollars when carried out correctly. Partnering with knowledgeable tax professionals can help you decide if cost segregation is worth it. Contact us today!
