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Cost Segregation For Residential Buildings

It’s well-known that cost segregation studies are ideally suited for commercial real estate. But Cost Segregation is also good tax strategy for residential real estate too? You bet!

As your building ages, it loses value. That’s called depreciation. When you do a cost segregation study, it classifies your building’s components (like the lighting system) into shorter recovery periods so you can write off the components faster in your taxes and reduce taxable income. The study carves out certain qualifying portions of your building into five-, seven- and 15-year lives that are normally accounted for in 39- or 27.5-year categories.

Cost segregation frees dollars that can – in most cases – be invested immediately so that you can increase the property’s value over time. What’s more, the latest tax reform made cost segregation even more lucrative by doubling bonus depreciation from 50 percent to 100 percent, and this tax benefit applies to qualifying used property. This allows for much greater immediate tax deductions.

While commercial real estate is subjected to a 39-year depreciation period, residential real estate can be depreciated over 27.5 years from the time when it first becomes rentable.

Some accountants depreciate apartment complexes or other multifamily housing property over 39 years, but they’re mistaken. Residential rental property should be depreciated over a 27.5-year recovery period. Only nonresidential real property should be depreciated over 39 years.

What constitutes residential rental property? Buildings or structures for which 80 percent or more of the gross rental income is rental income from dwelling units. Therefore, an apartment complex, which falls within the definition of residential real estate, should be depreciated over the shorter 27.5-year recovery period. Too often, residential real estate owners and investors fail to understand the terrific advantage a cost segregation study could deliver.

You can have a cost segregation study done on your building anytime, but it’s best to do it right after you’ve purchased your property so you can write off assets removed during remodeling or replacing building components. If you do a study right after acquiring your building, you’ll be able to claim bonus depreciation, which can create a write-off as high as 30-40% of your total purchase price in the first year.

Case Study: Restaurant

cost segregation case study

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Testimonials: Our valued clients

Melissa Flagstad, Partner
Melissa Flagstad, PartnerUS Facilities Lighting
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“Engineered Tax Services (ETS) found 250k in tax credits for one of our manufacturing clients. ETS makes our business bigger and stronger. Not much more you can ask from a partner.”
William Mays
William MaysGoldin, Pesier & Pesier, LLP
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“The entire ETS team includes professionals of the highest caliber…they have proven to be a true partner to our firm – as well as the clients we have engaged. With ETS, we have added Section 179D to our service offerings. This has gotten us to the table with many coveted prospects with whom we had been previously shut out. ETS is an outstanding partner, demonstrating high intelligence, entrepreneurial spirit, expertise, quality, professionalism and responsiveness. We are looking forward to incorporating their cost segregation services for the benefit of our clients in the near future.”
Goldstein Schecter Kosh
Goldstein Schecter KoshGoldstein Schecter Kosh
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“Engineered Tax Services has been a very valuable engineering resource to our firm over the past decade. We find their firm the only licensed engineering firm to be uniquely qualified to handle the complex issues regarding cost segregation, 263a, 179D and repair and maintenance. We did our due diligence and the results speak for themselves as Engineered Tax Services is the dominant engineering resource to the CPA community.”
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While traditionally cost segregation studies are conducted onsite, the COVID-19 pandemic calls for a safe alternative—one that provides you with the same ability to reduce tax liabilities and increase cash flow.

Tele-Engineering – a virtual approach to cost segregation – offers the same high level of detail and support as in-person visits, while eliminating costs and social safety issues.

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Cost Segregation study on a $2.6 Million Apartment Building in Jenks, OK

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Cost Segregation study on a $983,000 Apartment Building in Concord, NH

Without a Cost Segregation study, a $983,000 Apartment Building in Concord, NH, purchased in 2019 would have generated a 1st year depreciation of $21,237.66. By …

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