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cost segregation

real estate cost segregation

3 Things You Should Know About Cost Segregation for Real Estate

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For many years, accounting firms have relied on cost segregation as a tool to preserve capital and help their clients benefit from massive tax relief. Through accelerated depreciation, reclassification of assets, and write-downs, a business can reduce their tax burden significantly and free up cash. 

Despite the effectiveness of cost segregation in the past, new tax reforms that went into effect on January 1st, 2018, make cost segregation more beneficial by offering additional depreciation classification, and a rate of up to 100% for new and acquired properties up from 50%. 

But cost segregation for real estate is not for everyone or every business. There are a few things you need to know to help you make the most out of cost segregation. 

1. It is not for all properties 

The benefits of cost segregation are limited to specific properties and beneficiaries. To qualify for cost segregation, the property in question needs to meet the following criteria: 

  • The property should be an investment property. 
  • Permanent residentials that don’t depreciate because of the ownership structure are also considered. 

Additional requirements for properties or companies to qualify for cost segregation include: 

  • Companies that have recently constructed, purchased, or are planning to buy or construct a building.
  • Company-owned or leased buildings that have been recently renovated.
  • The construction, renovation, or purchase cost of the building in question should have cost $300,000 or more.

If the property meets the above criteria, cost segregation could help the company make substantial savings from tax deductions and instantly improve cash flow. 

In addition to the criteria, the application for cost segregation must meet the rigorous application and requirement procedures of the IRS.

2. The cost is not straightforward 

Most companies that have applied for cost segregation have quickly realized the process is not as straightforward as it looks. 

A cost segregation study is not inexpensive, even for an average study. Before jumping in feet first, the expected savings must significantly outweigh the cost of the study

A cost segregation study starts anywhere around $10,000 and could cost as much as $25,000 for a well-done study and a written report. 

Even with the budget, not all properties qualify because the study is only one step of the process. To give yourself the best chance of success, you have to ensure you check on all the right boxes. Some requirements include: 

  • Either you, your spouse of the both of you are real estate professionals.
  • Your W-2 income falls below $150,000.
  • You’re selling the property.

Other than the typical costs, additional charges depend on the location of the building, whether the building is new or existing, and the nature of the property.

There are also other charges that you might incur down the road. To ensure the trouble is worth your while, it’s necessary to involve your accountant to make sure you can qualify for cost segregation before you start the application process.

3. Cost segregation application doesn’t follow the calendar year 

Unlike other tax processes, cost segregation doesn’t have to be determined by December 31st. You can do it in March or April of the prior tax year. 

It can be done at any time of ownership, even by the current owners, which means time is not a limitation, and you can start enjoying the tax deduction at any time. You can also extend the study to other rental properties in your portfolio.

Using the savings you accumulate on one property, you can offset the other properties, or even offset your active W-2 income taxes. 

Even though you’re not pressed for time, you can make more savings by requesting for a cost segregation study the year the property is placed in service by the current taxpayer.

Making the most out of cost segregation requires a strategic approach with the help of an expert who understands the process. If you would like to know if you qualify for a cost segregation study and learn more about this monumental tax-saving opportunity, get in touch today. 

What is Cost Segregation in Real Estate?

By | Cost Segregation, Tax Incentives | No Comments

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!