Cost segregation is a highly beneficial and widely accepted tax planning strategy utilized by commercial real estate owners and tenants to accelerate depreciation deductions, defer tax, and improve cash flow. Once used only by big-4 type accounting firms and the nation’s largest real estate owners, this practice has now become routine for commercial property owners of almost every size.
A Cost Segregation Study (CSS) is based on a detailed engineering-based analysis that is used to support the acceleration of depreciation deductions by identifying costs that can be allocated to shorter recovery periods; primarily 5, 7, and 15-year, as opposed to 27.5 (residential rental) or 39-year (commercial).
A quality study provides the documentation needed to defer substantial tax payments and greatly improve cash flow. It is important to note that a cost segregation study does not create new deductions, but increases deductions in the early years of ownership. This front-loading of depreciation allows the taxpayer to take advantage of the time value of money.
There are a number of benefits associated with cost segregation and its various applications. The primary benefit of course is significantly improved cash flow. This is most often achieved through the acceleration of depreciation deductions and the resulting tax deferral. In addition to the impact of accelerated depreciation, cost segregation may also allow for…
- Reduction of estimated quarterly tax payment
- Property tax savings
- Transfer tax savings
When prepared correctly, a cost segregation study can also be an excellent asset management tool. To learn more about using cost segregation throughout the Life Cycle of Real Estate, and the additional benefits that may be available please visit our Life Cycle of Real Estate page.
With the recent release of the IRS Tangible Property Regulations, a well prepared cost segregation study can serve as the basis to provide defensible values for Asset Retirement or Unit of Property determinations.