Cost Segregation Overview

 

Cost segregation is a valuable tax strategy utilized by owners of commercial and residential rental property to accelerate depreciation deductions, defer taxes, and improve cash flow. A quality study provides the appropriate documentation needed to support the correct classification of depreciable assets related to a building and exterior improvements. It is important to note that a cost segregation study does not create new deductions, it simply increases deductions in the early years of ownership. This front-loading of depreciation allows the taxpayer to take advantage of the time value of money.

From a tax perspective, cost segregation should be considered routine for all property owners who own or manage real estate. Not only will a study support accelerated depreciation by reclassifying eligible assets into shorter lives, but it can also provide valuable data to support important tax-centric initiatives during the holding period of the property.

During a study, the property is thoroughly examined, and its components are categorized into different asset classes, each with its own depreciation schedule, according to the IRS guidelines. These asset classes typically include:

  • Real Property

    (Building Structure)

  • Personal Property

    (Furniture, Fixtures, and Equipment)

  • Land Improvements

    (Landscaping, Parking Lots, Sidewalks,etc.)

It’s important to note that a study should be performed by qualified professionals, as it requires a deep understanding of tax law, construction techniques, and engineering principles

How does it work?

When a property is purchased, not only does it include a building structure, but it also includes all of its interior and exterior components. On average, 20% to 40% of those components fall into tax categories that can be written off much quicker than the building structure. A cost segregation study dissects the construction cost or purchase price of the property that would otherwise be depreciated over 27 ½ or 39 years. The primary goal of a cost segregation study is to identify all property-related costs that can be depreciated over 5, 7 and 15 years.

We help real estate owners identify faster-depreciating assets and segregate them into their IRS-approved categories.

So you pay less tax and get better value for your money today.

While tax savings vary, the positive benefits of a cost segregation study can be quite significant based on calculations involving the individual’s overall tax situation and the specific assets in any given property.

Recent tax law changes under the Tax Cuts and Jobs Act of 2017 have given an additional boost to cost segregation. Bonus depreciation (the federal tax incentive that allows a business to immediately deduct a large percentage of the purchase price of eligible assets) was increased from 50% to 100% for a few years before being phased out over time. (New legislation to extend bonus depreciation is being considered by Congress). A cost segregation study produced by CDK Cost Segregation will separate any costs that qualify for bonus depreciation to optimize your opportunity.