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What Is a Cost Segregation Study?

| August 8, 2023 | By
A large residential construction project surrounded by cranes and a shell structure.

Cost segregation studies are designed to benefit businesses that have bought, built, updated, or increased their real estate investments. How does this strategy work? It accelerates depreciation deductions, which helps defer state and federal income taxes. 

By allocating all property-related costs into their appropriate property classes, a cost segregation study can help businesses save significant money. 


How does a cost segregation study work?

A typical depreciation schedule permits real estate depreciation over a long period of time—27.5 to 39 years. However, accelerated depreciation deductions allow the depreciation of certain assets in five, seven, or 15 years. If you’re unsure whether a cost segregation study is the right strategy for you, contact our team today to identify whether or not any of your renovations qualify for an accelerated depreciation schedule. 

This method segregates eligible real estate costs and expenses, potentially leading to significant financial savings for commercial property owners. Many different construction-related expenditures may qualify for accelerated depreciation. Eligible real estate costs typically involve a structure’s non-structural elements, land improvements, or indirect construction costs. 

What are personal real estate assets? This type of asset typically includes items that aren’t viewed as necessary for a building’s overall operations and maintenance. This could include items like home appliances, furniture, equipment, and even vehicles that are used for business purposes.

Eligible land improvement deductions may include a broad range of expenses, such as walkways, parking lots, driveways, fences, and landscaping. According to cost segregation tax regulations set forth by the IRS, businesses can separate landscape elements into different parts such as plants, rocks, trees, security lighting, and more. 


What are the advantages of carrying out a cost segregation study?

Now that you understand what a cost segregation study is, let’s take a closer look at some of the advantages it may offer:

1. You can lower local realty-transfer taxes.

A cost segregation study may reduce local realty-transfer taxes because local governments often assess these applicable fees based on a building’s fair market value. A cost segregation analysis lowers a building’s overall value, resulting in a reduction of applicable transfer taxes. 

2. You can increase cash flow.

Analyzing expenses related to property renovations, construction, purchasing, and improvements will ultimately minimize taxable income. This means that less of your money will go toward paying local, state, and federal taxes. 


What are the disadvantages of carrying out a cost segregation study?

1. A cost segregation study can be expensive.

A cost segregation study can be expensive, costing anywhere from $10,000-$25,000. However, the price depends on the property’s age, location, type, and the time it takes to complete the study. Segregating costs isn’t the right strategy for every property, but it is likely worth it for buildings that are valued at more than $500,000.

2. Costs may not be straightforward.

The process of separating eligible costs may not be simple or straightforward for business operators, depending on the type of building and property size. That’s why it’s extremely important to work with knowledgeable and experienced tax professionals who can help you make the right decision. 


How do I know if cost segregation is worth it for my business?

Cost segregation won’t be the right strategy for every business property, but this often-forgotten tax strategy has the potential to save you significant money, even up to thousands of dollars. 

When it comes to cost segregation, it’s more important than ever to work with knowledgeable tax professionals. They can help you understand if it’s worth carrying out a cost segregation study on your commercial real estate property.


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