Are you a property investor who is interested in making tax savings and reducing tax liability? If so, our cost segregation services could be a valuable strategic tool to reduce your IRS bill tax. This savings tool can allow you to enjoy increased cash flow and make your investments more profitable. Cost segregation studies (CSS) on your investment properties could save you thousands of dollars by accelerating depreciation deductions.
We know that investment professionals and taxpayers are constantly on the lookout for minimizing tax obligations. Quality cost segregation analysis is one of the many legitimate ways to reduce your overall tax bill, resulting in significant savings and improved cashflow for you to enjoy.
On this page, you will learn what is involved in a quality cost segregation study. Additionally, you can find out how defer taxes (federal and state) and that is possible on any commercial building you own.
What is Cost Segregation?
A cost segregation study is a tax-saving strategy allowing property owners to speed up certain depreciation deductions. Commercial real estate owners who have purchased, renovated, constructed, or expanded real estate can take advantage of many tax services. A CSS identifies non-structural elements that can be depreciated in a shorter time.
Traditionally, depreciation schedules allow for real estate depreciation over a 27.5 or 39-year period. However, accelerated depreciation deductions mean that you can depreciate certain assets or elements in a short schedule — in five, seven, or 15 years. This way of segregating eligible real estate costs can result in substantial savings for commercial property owners.
We’ve developed a calculator to help you understand if and how much you could be eligible for. Use tax law to your advantage and save on depreciation deductions and increase cash flow with the help of our tax professionals.
What Do Cost Segregation Services Include?
- A building’s non-structural elements
- Land improvements
- Indirect construction costs
Land improvement deductions for tax purposes can include areas such as parking lots, walkways, fencing, driveways, and landscaping. Under cost segregation tax law, the IRS says that you can separate landscape elements into various parts such as security lighting, plants, trees, and rocks.
Indirect construction costs unrelated to the building’s cost can include architectural fees, trash collection, building appraisals, and construction management.
Cost Segregation Case Studies — Real Property Examples
Real property examples can help to illustrate the tax-saving benefits from cost segregation.
With no cost segregation, all associated costs with the property are deducted over 27.5 years for residential rental properties and 39 years for commercial buildings. Let’s look at the savings in tax you could enjoy by having a cost segregation evaluation done.
Let’s say an apartment building costs $1.4 million. Under a typical long-term depreciation schedule, the depreciation in the first year would be around $30,246. However, by breaking down the building components, a property owner can benefit from huge savings.
Here is how cost segregation can result in substantial tax cuts during the first year:
- Furnishings and personal assets are reclassed at 20.25%, resulting in savings of $284,088.59 per year for the first five years.
- Land improvements are reclassed at 2.47% and result in savings of $34,694.98 per year for the first 15 years.
- The rest of the building is depreciated at the typical rate over 27.5 years. This is a saving of $1,643.10 per year for 27 years.
You can see that, with the help of a cost segregation specialist, it’s possible to increase cash flow by accelerating tax depreciation deductions in the first five and 15 years. In this case, the property owner has a first-year depreciation of over $330,400. That is a difference of over $290,000 in first-year tax savings.
Are Cost Segregation Services Worth it?
Getting a cost segregation analysis on commercial real estate is worth it if you can lower taxable income. Of course, one of the most significant advantages is to increase cash flow. However, implementing a cost segregation strategy is only worth it if you get tax professionals skilled in property tax law to prepare the study.
Let’s look in more detail at how your business could profit from a cost segregation study.
How cost segregation can increase cash flow
The goal of analyzing expenses related to property renovations, construction, purchasing, and improvements is to minimize taxable income. This results in less of your money going toward paying for local, state, and federal taxes. The tremendous savings you can benefit from the result in greater cash flow and increased revenue.
Tax savings through accelerated depreciation
The cost of a segregation study can more than pay for itself in savings on your tax bill. Tax experts analyze the money spent on construction costs or purchasing costs against depreciable assets that are classed as the owner’s property.
Generally, all components that can be treated as personal property are depreciable over five or seven years. Money spent on land improvements can be depreciated over 15 years. By accelerating depreciation on shorter-lived assets, you can make significant tax cuts. There is also bonus depreciation that can result in even more significant savings.
How Much Does Cost Segregation Cost?
The cost of a segregation study depends on the building type, property size, and other factors. In many cases, segregating costs and expenses is effective for buildings worth over $500,000. However, tax professionals can help you decide if it’s worth exploring the gains of cost segregation on a residential rental property or commercial real estate.
You can arrange for a CSS any time after purchasing, renovating, or constructing a commercial property. However, the optimal time to analyze the possibility of segregating investment costs is in the first year. This makes it easier to get all the necessary documentation to conduct a detailed review and inspection.
Cost Segregation Services — In Conclusion
Using cost segregation is a vital strategic tax savings tool to lower tax liabilities with the IRS. Segregating costs between those associated with the building’s cost and operation from non-structural elements can save thousands of dollars during the first few years. To find out how your business could benefit, we advise you to speak to tax experts who can help you save money and increase your cash flow and profits.
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