What is a Cost Segregation Study?
A cost segregation study is a meticulous engineering-based analysis of your property.
It identifies the components eligible for accelerated depreciation.
This analysis accelerates the depreciation schedule of eligible building components from the standard 27.5— or 39-year class lives to 5, 7, or 15-year class lives.
Once the engineering-based cost segregation study is applied to your income taxes, the impact is significant. The amount you owe on your income taxes is reduced; therefore, you keep more of your hard-earned money.
A cost segregation study can reclassify certain building components, such as electrical systems, plumbing, and HVAC, into shorter depreciation classes. This allows property owners to claim accelerated depreciation deductions on these components, resulting in significant tax savings.
Below is the step-by-step breakdown of a typical cost segregation study.
10 Ideal Cost Segregation Candidates
1. Commercial and Residential Real Estate Investors
1. Commercial and Residential Real Estate Investors
1. Commercial and Residential Real Estate Investors
Owners of industrial facilities, office buildings, retail stores, hotels, commercial buildings, and other income-producing properties can significantly accelerate depreciation deductions. This reduces taxable income and translates to higher cash flow.
Investors in multi-unit residential properties like duplexes, triplexes, and apartments can benefit even if the property value is below the typical cost segregation study threshold.
2. Businesses That Own Their Property
1. Commercial and Residential Real Estate Investors
1. Commercial and Residential Real Estate Investors
Companies that own their office buildings, warehouses, or manufacturing facilities can use cost segregation to claim faster depreciation on building components with shorter lifespans, such as electrical systems and carpeting.
This reduces current tax burdens and frees up capital for reinvestment.
3. Businesses That Leasehold Improvements
1. Commercial and Residential Real Estate Investors
3. Businesses That Leasehold Improvements
Tenants who invest in significant upgrades to their leased spaces can potentially claim ownership of those improvements through cost segregation.
This helps them depreciate the cost of the improvements over their shorter useful lives, reducing taxable income
4. Businesses in High Tax Brackets
4. Businesses in High Tax Brackets
3. Businesses That Leasehold Improvements
The tax savings generated by cost segregation studies are particularly impactful for businesses in higher tax brackets. The accelerated depreciation translates to a larger reduction in taxable income, leading to more substantial tax benefits.
5. Tax Advisors and CPAs
4. Businesses in High Tax Brackets
5. Tax Advisors and CPAs
Tax advisors and CPAs can enhance their services by recommending cost segregation studies and providing more value. This process helps their customers discover hidden tax benefits and reduce their tax liabilities, resulting to greater client satisfaction and loyalty.
6. Financial Advisors
4. Businesses in High Tax Brackets
5. Tax Advisors and CPAs
Cost segregation can be a powerful tool for building stronger financial plans for your clients. By incorporating potential tax savings, you, as a financial advisor can create more efficient cash flow strategies and help them achieve their financial goals faster.
7. Real Estate Developers and Contractors
7. Real Estate Developers and Contractors
7. Real Estate Developers and Contractors
Cost segregation can help developers and contractors position themselves as knowledgeable advisors to their clients and potentially use cost segregation as part of their service package.
8. Wealth Management Firms
7. Real Estate Developers and Contractors
7. Real Estate Developers and Contractors
Help your clients maximize their after-tax returns by identifying potential tax savings through cost segregation studies. This can significantly improve their overall financial picture and future wealth accumulation.
9. Manufacturing Businesses
7. Real Estate Developers and Contractors
10. Businesses That Have Recently Purchased or Constructed a Property Within the Last 15 Years
If you own real estate and pay taxes as a manufacturing business, you may be eligible for cost segregation. This applies to entities such as C Corps, S Corps, partnerships, and LLCs.
10. Businesses That Have Recently Purchased or Constructed a Property Within the Last 15 Years
10. Businesses That Have Recently Purchased or Constructed a Property Within the Last 15 Years
10. Businesses That Have Recently Purchased or Constructed a Property Within the Last 15 Years
Even if you haven't conducted a cost segregation study in the past, you can still benefit by performing one on a recently acquired or constructed property.
The IRS allows for "look-back" studies, enabling you to claim depreciation deductions you may have missed in previous tax years.
How much Depreciation can be Accelerated for my Property Type?
Cost Segregation is a tax-saving strategy that can speed up the depreciation of a property. The degree to which depreciation can be accelerated varies depending on the property type. Residential, commercial, industrial, and special-purpose properties all have unique characteristics that influence the possibility of depreciation acceleration.
