What is a Cost Segregation Study?
Cost segregation is a little known but commonly used tax planning tool available to commercial and residential real estate owners. It allows companies and individual people who have recently purchased, expanded, remodeled, or rebuilt any type of real estate to accelerate depreciation. This allows companies and individuals to claim more deductions on their taxes, increasing cash flow.
What is a Cost Segregation Study and How Will It Help Me?
When a property is initially purchased, it includes the land, the building structure, and all interior and exterior components of the building structure. Said another way, it takes into account the value of things such as the HVAC system, attached furnishings, and more. In most properties, 20% to 40% of these components can be reclassified under the existing tax code as eligible for “accelerated depreciation.” This means you can take the value of these interior and exterior components, and depreciate them much faster than the building itself, saving you money on your taxes.
The aim of a cost segregation study or survey is to place all assets that make up a property into four distinct categories, including:
- Personal Property
- Land Improvements
- Buildings or Structures
A cost segregation study looks at the purchase price or the construction cost of the property that ordinarily would be depreciated over 27.5 or 39 years. The goal is to look at all the items and property-related costs that can be depreciated faster than the 27.5 or 39 year schedule.
Usually these time-tables are 5, 7, or 15 year schedules. For example, if you look at each electrical socket that are dedicated for appliances like a server room, computer, or a refrigerator – these can be depreciated over 5 years. This is because they fall into the category of “personal property” rather than a building or structure. Improvements that you’ve made to land itself such as sidewalks, landscaping, or driveways are able to be depreciated over 15 years. Land, unfortunately, can never be depreciated.
What are the Benefits of Cost Segregation?
Many real estate investors and business owners are shocked when they learn how much money a cost segregation study can save. Here are some of the benefits of doing a cost segregation study:
- Cash Flow- It generates an immediate increase in your monthly and yearly cash flow by accelerating depreciation and tax deductions
- Write Off’s – A cost segregation study identified and numerates the value of various property add-on’s such as HVAC systems and plumbing. Once these need to be replaced, you can write off those expenses
- IRS Defense- A cost segregation study provides another layer of protection if you’re subjected to an IRS audit.
Estimate Your Cost Segregation Savings with our Calculator
We have built an easy-to-use cost segregation savings calculator that will estimate your potential savings on federal and state taxes. It provides:
- An estimate of the allocation to 5, 7, 15, and real property
- Tax deductions you’ll be able to claim and how much your cashflow will increase by
- Net present value over 10 years and over the life of the property
Try it for free below. You’ll enter basic information and receive a non-binding estimate.
What are the Steps Involved in a Cost Segregation Study?
If you’re using a reputable cost segregation firm, they’ll use all available information including public records, inspections, interviews, and more. They’ll then package these findings into a detailed cost segregation report that presents the information in an easy-to-understand, well-documented form.
Our process when we do a cost segregation study includes a detailed review of the relevant cost detail for any property, a detailed review of the property’s blueprints, and most times a physical inspection of the property. If none of these items are available, a cost segregation study can still be performed by estimating component values on the property site.
The ultimate goal of any cost segregation study is to identify the components of a property that can be classified as personal property or land improvements. Then, their value can be estimated and you can depreciate their value on a faster schedule than the typical 27.5 or 39 year plan.
The final cost segregation study that is delivered in a written format will show you exactly what you need in order to calculate accelerated depreciation deductions for your taxes. This cost segregation study also serves as backup in case you are audited by the IRS.
When Should I do a Cost Segregation Study?
You can do a cost segregation study or survey after a property purchase, when a property is remodeled, or construction has taken place. That said, the best time to do a cost segregation study is during the year one of these events has taken place (construction, purchase, remodel). If you are in the process of planning a construction or remodel, you should consider a cost segregation study before the infrastructure is set. By doing construction with cost segregation in mind, you can ensure that you save considerable money on federal and state taxes through accelerated depreciation. We offer a free consultation to determine the right timing and the right strategy when you plan a cost segregation survey.
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