What is Cost Segregation?
Cost Segregation is a tax strategy that allows real estate owners to utilize accelerated depreciation deductions to increase cash flow, and reduce the federal and state income taxes they pay on their rental income.
This is done by breaking down and reclassifying certain interior and exterior components of a building, which are typically depreciated over 39 or 27.5 years for commercial and residential properties, respectfully, to personal property or land improvements that are depreciated over 5, 7, or 15 years.
This is all handled in what is known as a cost segregation study. These studies are often conducted by a team of qualified engineers and/or CPAs.
Benefits of Cost Segregation
As mentioned above, cost segregation can reduce taxes, and greatly increase the cash flow of a property, especially in its early years of operation.
Thanks to the Tax Cuts and Jobs Act, used personal property placed into service after 9/27/17 is eligible for 100% bonus depreciation. That means real estate investors can deduct 100% of 5, 7, and 15 year property all in the first year.
This is what makes cost segregation so powerful and can lead to significant tax savings!
Of course, the building itself will have to still be depreciated over 27.5 or 39 years, and land remains undepreciable.
Is a Cost Segregation Right for Me?
There is a cost involved with having a study done, and the net benefit (or lack thereof) will depend largely on the property you own as well as other tax considerations.
Cost segregation has the potential to benefit any property. However, owners of larger multifamily or commercial properties will benefit the most from these studies and should definitely consider having a study done.
The Bottom Line
You don’t have to be part of the 1% to utilize cost segregation and significantly reduce your taxable income.
Please give us a call to help you decide if it’s the right fit for your rental property, and then walk you through the process.