Using cost segregation to maximize your tax deductions lets you improve your tax strategy and save more.
If you are a commercial real estate owner, and have not leveraged cost segregation to increase your current tax deductions, there is no better time than now. Cost segregation is a highly beneficial and widely accepted tax planning method utilized by property owners to accelerate depreciation deductions, defer taxes, and improve cash flow.
By partnering with a qualified cost segregation firm for a cost segregation study, property owners can expect to allocate/reallocate anywhere from 20 – 40% of the depreciable cost basis to shorter terms. For example, for every $100,000 moved from 39-year to 5-year, the 10-year net present value savings is approximately $25,000 (based on a 35% tax rate and a 6% discount rate).
Who can benefit from a cost segregation study?
Commercial real estate owners of properties placed in service after December 31, 1986 will qualify for a cost segregation study. There are no restrictions on the size or value of the eligible property; however, the cost associated with the study may prevent owners of lower-value properties from receiving enough savings through tax deductions to justify the cost of the study. Your property is most likely a good candidate for a cost segregation study if it has a depreciable cost basis of $1 million or more.
When should a cost segregation study be done to maximize tax deductions?
Typically, the most value is realized in a cost segregation study when conducted within the first year of ownership. By maximizing depreciation deductions from year one, property owners can see the greatest return on their investment.
If this isn’t your first year of ownership, never fear. Look-back studies can be completed based on properties that were purchased as far back as January 1, 1987. These look-back studies generally make the most sense for properties that have undergone significant improvements in the last several years. A qualified cost segregation firm can help you determine if the cost segregation study will likely yield enough savings through tax deductions to justify the cost of the study.
How do I choose a cost segregation firm to help me increase my current tax deductions?
Choosing a firm to conduct your cost segregation study is critical. While you may feel like your accountant has this area covered, most accounting firms do not dig in to cost segregation at the appropriate level of detail or defensibility. As engineers, cost segregation experts will provide a higher level of knowledge to ensure that your study will hold strong in the event of an IRS audit. Here are some things to look for in a cost segregation provider:
- – They charge a fixed fee, NOT a contingency fee (or a percentage of your savings)
- – They provide detailed engineering analysis that includes review of cost data, building plans, and lease agreements
- – They do on-site evaluation(s) conducted by qualified engineers
- – They provide a detailed breakdown of costs and appropriately allocate them to the correct recovery periods.
- – They can clearly show you that the numbers provided reconcile to the property’s total depreciable cost basis
By accelerating depreciation to maximize your early tax deductions, cost segregation can improve current ROI for property owners by 20 – 40%. Knowing the value of cost segregation is the first step in achieving these savings – contacting a cost segregation firm that can help you determine if these tax strategies are right for your property is the next.
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