WHAT IS COST SEGREGATION AND WHY SHOULD I DO IT FOR MY INCOME PROPERTY?
Cost Segregation is a commonly used strategic tax planning tool that allows building owners who have constructed, purchased, expanded or remodeled real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes.
A Cost Segregation study for a residential investment property allocates similar property to "classes" The straight-line method depreciates an equal amount for each of 27.5 years and for commercial properties the time is 39 years.
Accelerate Depreciation Deductions: The primary goal of Cost Segregation is to identify all property-related costs that can be depreciated faster (typically over 5, 7 or 15 years).
Retirement and Partial Disposition Deductions: The secondary goal of Cost Segregation is to establish the depreciable tax value for each major building component that is likely to be replaced in the future. Examples include the roof, windows, doors, bathroom fixtures, HVAC, etc. When a component is replaced, taxpayers need this information to claim a “retirement loss” or “partial disposition” deduction for its remaining depreciation.
Bonus Depreciation, if elected, can be accelerated to the first year and includes the standard 5 year, 7 year, and 15 year categories. If the income properties were put into service between 9/27/17 and 12/31/22 they qualify for 100% Bonus Depreciation. Income property that is put into service in 2023, can claim Bonus Depreciation at 80%. Depreciation recapture and 20 year exclusions are considerations for some clients.
What qualifies?
Commercial buildings of any kind constructed or purchased since 1987 are eligible.
New buildings qualify for accelerated depreciation deductions starting right away.
Buildings purchased or constructed since 1987 are eligible for “catch up” adjustments producing large tax deductions and increased cash flow.
Commercial buildings can be owned by the operating company or by an individual, a LLC, a partnership or Family Limited Partnership.
If the operating company or real estate holding entity is paying taxes, you'll find savings.