The Basics of Cost Segregation
What is cost segregation?
Simply, cost segregation is a tax deferral strategy that identifies assets within a building that can be depreciated over a shorter period than the 39-year standard method. It can identify substantial tax-saving opportunities for taxpayers who have constructed, purchased, or renovated a facility. The process combines engineering, construction, and tax expertise to maximize tax deductions for prior and current real estate investments.
· Take advantage of bonus depreciation
· Use the extra cash flow to invest in additional income-producing properties.
· Leverage the value of your depreciable assets for renovations and improvements.
· Accelerate your tax depreciation
· Save tax dollars from your depreciable asset investments.
The benefits of a cost segregation study
Using the standard method, depreciation of your commercial property spans evenly over 39 years for all assets or parts of the building. However, the IRS will allow shorter depreciable lives on certain components of the building, like a portion of your HVAC, plumbing, electrical, or building finishes. With a cost segregation study, a portion of your building’s assets could be allocated into a shorter life bucket and thereby qualify for bonus depreciations. The value of those assets could allow property owners to invest in additional income-producing properties.
In the long term, a cost segregation analysis can help property owners claim a disposition loss when making repairs or improvements to a building’s assets, such as installing a new roof. As a result, the benefits of a cost segregation study go beyond the first year as you repair and replace your building’s assets over time.