Did you know that you can experience tax savings and ROI on contracted or newly purchased buildings? Each building has value, and over time that value lowers due to normal use and deterioration. A tax deduction called depreciation reflects this loss of value over time and allows a property owner to recover the cost of wear and tear.
In the past, a building was treated as a single asset, and each of the internal components that made up the building was all calculated into one single asset value which was depreciated over 39-years. This means that over the term of 39-years, your tax deductions remained exactly the same year to year. The problem with this approach is that it is not tax efficient. We all know well that most components of a building do not last 39-years. Such components that don’t last 39 years include carpeting, lighting, heating and cooling systems, landscaping and land improvements. 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 in such a tax manner under the traditional depreciation method can be difficult in managing cash flow.
However, a more favorable system exists that allows you to depreciate the individual assets within the building and accelerate your tax deduction plan much sooner, thus creating a substantial wealth and cash preservation for the real estate investor. With cost segregation, an IRS-recognized and approved technique, the individual assets are expensed based on their individual depreciable lives as opposed to being part of the building as a whole.
Segregating Your Assets for Tax Savings
Short-term asset segregation of building components that are non-structural in nature include fixtures, flooring, cabinetry, internal piping, landscape, parking lots, land improvements, mechanical systems, lighting systems, special electrical work, and building finishes.
When you segregate these assets from the structural portions of the building, cost segregation can become a powerful tax planning tool for maximizing tax deductions that lead to great wealth preservation by managing your investment in the most tax-efficient manner.
With cost segregation, in this example, the investors of the building will have accelerated tax deductions of over $1.2 million dollars a year for the first five years. Without the study, the same investors would only be able to take $385,000 in tax deductions. This equates to $815,000 in additional tax deductions and at a combined federal and state tax rate of 50% the wealth preservation is $407,500.
A cost-segregation engineering tax study provides additional tax benefits annually by allowing you to expense the repairs, and maintenance and/or dispositions as you improve your building. Additional benefits from a cost segregation study can come from insurance savings, energy cost savings, and property tax savings. For a free consultation or to learn more, please call (800) 236-6519.