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Tax Incentives

What is Cost Segregation in Real Estate?

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For those working in the investment real estate business, a well-implemented cost segregation study will quickly be shown to accelerate depreciation and benefit your financial situation. By undergoing a study, real estate owners will take advantage of accelerated depreciation deductions and shelter taxable income. Doing so will immediately reduce the amount of income tax that the company or individual will have to pay that year, improving cashflow. For investors with estimated quarterly payments, these studies can also help defer the payment of their income taxes. 

HOW DOES A COST SEGREGATION STUDY WORK?

A cost segregation study is a rigorous process where a cost segregation engineer analyzes real estate assets and identifies property with shorter depreciation life (personal property) from the real property , which is what creates accelerated depreciation benefits. 

The goal of each cost segregation analysis is to separate holdings into distinct categories, or asset classes, that have different depreciable recovery periods. The four main categories and their typical depreciation lives are as follows:

  • Tangible personal property, which are non-structural components of a building (furniture, fixtures, carpeting, window treatments, and specialized plumbing and electrical components, for example) typically has a five to seven year depreciable lifespan.
  • Land improvements are components found outside a building’s footprint (sidewalks, paving or landscaping) depreciate typically over fifteen years.
  • Buildings depreciate over 27.5 or 39 years depending whether the type of property is residential rental or commercial.
  • The land itself, which is not depreciable.

THE IMPORTANCE OF A GOOD CONSULTANT

Cost segregation studies involve a lot of detailed knowledge of the regulations surrounding all tax incentive rules, so finding the right provider to guide you through each step is very important. The cost segregation consultant will find every component of your property that can be legally considered to be shorter life property and reclassify those assets to generate more depreciation deductions for income tax purposes. 

Once the study is finalized, the client will be provided with the information they need to calculate the accelerated depreciation deductions for income tax purposes.  The cost segregation report will also act as supporting documentation in the possibility of any IRS audit.  

In general terms, any piece of commercial real estate that was acquired, built, or put into service after 1986, including acquisitions, construction, building, or improvements- will be eligible for cost segregation.  

At Incentax, we help companies gain access to money-saving tax incentive programs at both the federal and state level. Our team is entirely made up of tax incentive experts and engineers, that guarantee a high level of quality in our work by offering audit support for free. For more information about our services or processes, contact us today!