As real estate development continues to soar, property owners are becoming more educated on tax tools – like depreciation – to reduce their costs. Cost segregation increases cash flow in the form of a deferral by utilizing short class lives to accelerate depreciation on residential and commercial real estate property.
Cost Segregation: Accelerate Depreciation On Your Real Estate Holdings
Every building has an original purchase or book value, and over time that value decreases due to normal use and deterioration. Depreciation reflects this loss of value over time and allows a property owner to recover the costs of wear and tear. A cost segregation study is an engineered analysis of all the costs associated with an investment property. The study classifies certain components into personal property versus leaving those items in categories that are otherwise subject to 39 or 27.5-year depreciable class lives. By utilizing cost segregation techniques, the owner is provided with the necessary substantiation to significantly decrease their income tax liability and free up the company cash flow. Cost segregation is one way to ensure all the components are identified and correct methodologies are applied.
This process aids in future benefits via dispositions, repairs, routine maintenance, and overall asset management. Additionally, the tax savings can be reinvested into the property and seen as a net present value. Whether newly constructed, purchased, or renovated, the components of your building may be properly classified via this process.
Added Tax Benefits of Cost Segregation
- Identifying repairs & maintenances expenses
- Identifying disposition expenses
- Insurance savings
- Energy cost savings
- Property tax savings
It is important to stay up to date with all federal government and IRS laws and regulations.
The History of Cost Segregation
In the past, a building was treated as a single asset where each of the internal components that made up the building were all calculated as one single asset value that was depreciated over 39 years. This means that over the term of 39 years, the tax deductions remain exactly the same year to year. However, most components within a building do not last 39 years. For example, carpeting, lighting, heating or cooling systems, landscaping, and land improvements are ever-changing. It is very tax inefficient to have to depreciate an asset over 39 years that will truly be disposed over a 5-year period or less. Treating the building under this traditional depreciation method makes it difficult to managing cash flow.
In 1962, the Investment Tax Credit Act was enacted to increase interest in investments and reduce recession and inflation. Since then, this legislation has been changed and re-interpreted many times.
For more information or a free cost segregation consultation, please contact Engineered Tax Services at (800) 236-6519.