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Why Engaging a Cost Segregation Study can be a Tax Benefit

Why Engaging a Cost Segregation Study can be a Tax Benefit

August 05, 2021

One of the most significant and often overlooked IRS-sanctioned tax strategies for Real Estate investors is a Cost Segregation Study of your properties. A cost integration study can allow various subcomponents of a building to be depreciated in an accelerated timeframe reducing your tax liability, therefore, freeing up your cash flow.

The standard IRS tax depreciation schedule for commercial buildings is 39 years or 27.5 years for apartment buildings. A cost segregation study identifies various approved components inside your building and reclassifies them to accelerate the depreciation schedule for either 5, 7, or 15 years. 

Some of the eligible components considered in this process are:

  • Flooring
  • Wall coverings
  • Electrical Systems
  • Ventilation Systems
  • Plumbing 
  • Security Systems
  • Light fixtures etc.

On average, 20% to 40% of those components fall into tax categories that can be written off much quicker than the building structure. 

The Journal of Accountancy reports, "The advantage of these front-loaded deductions will be quantifiably greater than had the deductions been spread over longer periods of time using slower depreciation methods." Commercial real estate investors that engage in a cost segregation study can reduce their tax liability and free up cash flow.  

Our Client Saved $165,000 

Last year our team worked with a client who had a taxable gain of $500.000 from the sale of his business. Our Client invested in commercial real estate property and secured a cost segregation study. Armed with the report, our team had the information needed to reclassify some of the building components. Our Client saved $165K in taxes his first year! 

The cash flow savings allowed him to purchase two additional properties, and again he secured a cost segregation study for these new properties. The accelerated depreciation expenses for all three properties provided our Client with losses that negated his income. This year he only paid $30,000 in state taxes and $0 in Federal taxes. Engaging the cost segregation study for his three properties has provided our client tax benefits for years to come.

Can I Qualify for Cost Segregation?

Consult your CPA about a cost segregation study if you own apartment complexes, Assisted Living Facilities, Manufacturing Operations, Distribution Centers, or Commercial Buildings. The IRS requires an engineering-based cost segregation study to identify the components that qualify for accelerated depreciation. Our team is well versed in this process and can assist you in finding a professional company to complete the study. The study will identify the eligible components for accelerated depreciation. 

As an additional incentive under the CARES Act, bonus depreciated increased to 100% through 2022. The law was updated to include qualified improvement property after January 1, 2018, with a "15-year class life" is also eligible for 100% bonus depreciation.

Don't miss out on the opportunity to have some of your commercial assets reclassified to free up your cash flow. Contact our team of experts to take advantage of this overlooked tax strategy.