Real estate investors have two options to expense their real estate costs. One is the traditional straight-line method and the other one is the cost segregation method. The second method renders a lot of benefits to real estate investors. This includes accelerated depreciation, decreased taxable income, and an increase in cash flow.
After the CARES Act, the value of a cost segregation study has increased.
The value of bonus depreciation has shown a spike to 100% through 2022.
The Tax Cut and Jobs Act have also expanded, it has started to include acquired properties as well.
Other than this the CARES Act came up with a new law that says qualified improved property after 01.01.2018 is assigned a 15-year class life which makes it eligible for a hundred percent bonus depreciation. It also allows real estate investors to deduct 100% of a 5,7 or 15 year property in the first year itself.
A cost segregation study helps real estate owners to accelerate depreciation and also increase the deductions with the help of bonus depreciation.
Understanding how cost segregation works
A cost segregation study identifies depreciable assets, like a building. A cost segregation study takes around thirty to sixty days, depending on the cost segregation expert you choose. In a cost segregation study, the personal property assets and real assets are identified and separated. This is usually done for the purpose of the IRS report. By reclassifying the personal property assets, a cost segregation study(CSS) reduces the depreciation time to optimize and organize tax reports.
The calculation and process involved in a cost segregation study
Usually, when a commercial property is in use, the generic method of depreciation used will be the straight-line method and this would be over a period of 39.5 years. However, in the case of a cost segregation study, it is quite different. The building is considered a whole and the components of a building are broken into four different categories. This includes land, building, land improvements, and personal property. The last two also qualify for shorter useful lives under the accelerated methods of depreciation. Tangible properties usually fall below the 5 or 7 years useful life whereas land improvements come under 15 years of useful life.
One important aspect to remember is, to get rid of being challenged in an audit, the IRS has provided training to its agents along with guidance. Auditors ask for written cost segregation reports prepared with expertise and experience. A CSS report usually includes a description of the property, a detailed analysis of which asset falls under which category, and images of the property.
Benefits of the study
Shorter depreciation time
The straight-line method takes usually 27.5 years or 39 years depending upon the type of property i.e. residential or commercial. A cost segregation study reduces the depreciation period to 5,7 or 15 years.
Easy depreciation recapturing
Annual reports with updated information can help in decreasing future costs and reduce the tax burden.
Tax relief and other benefits
In cases of developing a new building’s structure, or in cases of renovating or remodeling, as the owner of the property, you are responsible for the cost of the construction materials. A CSS will assign the value of the unused properties that are classified as tax deductions for charitable contributions.
Is a cost segregation study worth your effort?
A CSS is one of the best tax strategies. Accelerated depreciation helps in lowering the taxable income. This in turn increases the cash flow. Take up your free analysis and get a price quote.