Cost Segregation is a strategic tax savings tool that allows companies and individuals who have constructed, purchased, expanded or remodeled any kind of real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes.
In general, it is easy to identify furniture, fixtures, and equipment (FF&E) that are depreciated over 5 or 7
years for tax purposes. However, a Cost Segregation Study goes far beyond that by dissecting construction costs that are usually depreciated over 27 ½ or 39 years.
The primary goal of a Cost Segregation Study is to identify all construction-related costs that can be depreciated over 5, 7 or 15 years. Reducing tax lives results in accelerated depreciation deductions, reduced tax liability, and increased cash flow. Conducting a quality study involves review of cost details and blueprints, site inspection, photo documentation, cost estimation, and preparation of the report.
Benefits of Accelerated Depreciation
The depreciation of a property with a Cost Segregation Study allows for a significant increase in deductions within the first 5 years.
Assuming a combined tax rate of 41% and a return on investment factor of 8%, every $100,000 of costs shifted from 39-year property to 5-year property creates a present value tax benefit of approximately $22,000. Every $100,000 of costs shifted from 39-year property to 15-year property creates a present value tax benefit of approximately $12,000.
Who Can Benefit?
Any structure used for business or as rental property is eligible for the benefits of Cost Segregation. Leasehold improvements or renovation costs may also qualify.
Ideal candidates for a cost segregation project are:
- Buildings acquired, improved, or built in the last 15 years.
- Building with a cost of $750,000 or more for a freestanding building (not including land).
- Improvements to a building of $500,000 or more.
- Smaller residential properties with more than $150,000 of cost basis (not including land), and have 6 units or less.
- Owner is paying state or federal income tax. Taxable income is required to enjoy a tax benefit from a cost segregation study.
- Properties that will be held for 5 or more years. Depreciation recapture can be an issue for short-term holders (unless they do a 1031 exchange).
- REITs that are interested in controlling dividend distributions to shareholders
Examples of good candidates for cost segregation include offices of doctors and dentists, warehouses, laboratories, multi-family rental properties, shopping centers and office buildings.
Timing is Everything
The ideal time for a Cost Segregation Study can vary depending on an owner’s tax situation. Although the optimum time for a study is during the year a building is constructed, purchased, or remodeled, a study can be completed anytime afterward. In fact, current IRS procedures make it easy to go back and claim missed depreciation on assets acquired as far back as 1987 without amending prior tax returns. Our experts will help analyze your tax situation to identify the right timing for you.
Ask for a Free Preliminary Review
Massey and Company CPA provides a preliminary review of potential Cost Segregation projects at no charge. Our preliminary review includes a cost/benefit analysis which will help you to decide if a Cost Segregation Study makes sense for your real estate investment.
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Call our office at 678-235-5460 (Atlanta) or 773-828-0551 (Chicago) to discuss Cost Segregation in detail. Or email us at gary.massey@masseyandcompanycpa.com. Be sure to ask for your no-cost preliminary review based on your specific set of facts!
Massey and Company CPA is a boutique accounting firm with staff in Atlanta and Chicago. We provide tax and accounting services to small businesses and individuals throughout the United States.
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