Cost Segregation Services

Strategic tax benefits through cost segregation

If you own commercial or residential real estate, cost segregation might be just the thing to give a boost to your bottom line.

Cost segregation is a strategic tax planning tool that accelerates your tax benefits and defers federal income taxes. In general, buildings are depreciated over a period of 27.5 or 39 years. This very slow linear depreciation of your valuable real estate assets decreases your tax bill.

Cost segregation analyses can be used for real estate acquisitions, construction of new properties, and renovation. You can even go back to previous years and get “catch-up” benefits without amending your returns.

A cost segregation study can also maximize future write-offs. When any building component is replaced down the road, the cost segregation study provides the cost detail you need to write those off.

What is cost segregation?

A cost segregation study is performed by a qualified professional who will inspect your property, estimate the value of each component, and assess its proper tax classification.

A cost segregation analysis is an engineering-based study of all the costs associated with the construction or acquisition of a commercial real estate property or a residential rental property. The analysis aims to allocate the costs of constructing or acquiring a real estate property to different asset classes in order to identify the costs eligible for accelerated depreciation.

Cost segregation is applicable to almost all types of commercial properties, such as retail plazas, shopping malls, hotels, motels, restaurants, banks, warehouses, professional offices, medical offices, convenience stores, car dealerships, manufacturing plants and more. Long-term and short-term residential rental properties of all types also can qualify, whether they are single-family homes, garden- style communities, high-rise towers or affordable housing.

How does cost segregation work?

In the United States, for tax purposes, commercial buildings are generally depreciated using a straight- line method over a period of 39 years whereas residential rental properties used in long-term rental activities are depreciated over 27.5 years. As such, every year, over the course of a long 39-, or 27.5-year period, real estate owners receive a small portion of their construction or purchase price as a deduction for the use and obsolescence of their real property. This amount of deduction can be used to reduce their annual taxable income.

Instead of depreciating an entire real estate property over 39 years (for commercial property) or 27.5 years (for a residential rental) with a straight-line method, personal property assets identified during the course of cost segregation analysis are assigned shorter cost-recovery periods of five or seven years and can be depreciated using accelerated methods.

The cost or value of items identified as personal property and land improvements are also eligible for bonus depreciation, which can translate into their full depreciation in the first year. The result is a significant increase in the amount of depreciation deduction available to real estate investors in the critical first year of ownership. This increased amount of depreciation deduction in turn can be used to push taxes to later years and increase cash flow, which can be used for reinvestment in another project.

Cost segregation remains one of the most powerful strategies to simultaneously optimize cash flow and tax savings. Learn more here.

Cost Segregation Benefits

How much tax savings are possible through cost segregation?

Our cost segregation team includes engineers and CPAs who deliver complex cost segregation studies effectively, maximize tax benefits and provide the robust documentation required by the IRS.

The tax benefits of a properly administered cost segregation study and analysis will vary greatly depending on the type of property.

In general, for every $1 million reallocated from a 39-year property to a 5-year property, the net present value over the life of the property is approximately $200,000. The increase in cash flow associated with the reallocation of $1 million is approximately $330,000 over the first five years of placing the property into service.

Require a cost segregation study? We’ve got it covered.

Cost segregation studies are great for new properties valued at $500,000 or more and improvements over $150,000. Good candidates include:

• New construction
• Multi-family properties
• Professional offices
• Retail plazas
• Hotels
• Restaurants
• Warehouses
• Industrial buildings

Is a cost segregation study right for your property?

A cost segregation study can be a key part of tax planning and strategy. Not all cost segregation studies are created equal. Every building is unique, and your tax benefits depend on many factors such as purchase price, building use, construction methods used, design, and year acquired.

If you’re interested in finding out whether a cost segregation study is right for your property, the Kaufman Rossin cost segregation team can advise you about your best move.