Cost segregation is an essential tool for real estate investors to minimize state and federal income taxes. Many real estate investors who use it pay little or no income taxes. None. It’s that powerful, particularly for real estate purchased from September 28, 2017, through December 31, 2022.
What is Cost Segregation?
Cost segregation separates short-life and long-life real estate components, to maximize real estate depreciation and minimize state and federal income taxes. For example, landscaping, carpet, signage, paving, and blinds are all short-life items depreciated over 5, 7, or 15 years. The main building structure is depreciated over 30 or 40 years.
Tax Cuts and Jobs Act of 2017 – aka Bonus Depreciation
The Tax Cuts and Jobs Act of 2017 allow real estate investors to deduct the depreciation of the total cost of the short-life property of 20 years or less. For commercial and residential rental real estate, short-life items account for 20 to 45% of the total purchase price. This means the government funds 30 to 60% of the down payment in income tax savings. The Tax Cut and Jobs Act affect cost segregation for property purchased between September 28, 2017, and December 31, 2022.
Example of Cost Segregation Tax Savings
The Tax Cuts and Jobs Act (TCJA) turbo-charged the benefits of cost segregation. Consider the case of a garden-apartment project purchased for $5 million with a $1 million down payment.
|Before TCJA||After TCJA|
|Tax Savings at 37% (federal only)||111,000||582,750|
The federal government funds almost 60% of the $1 million down payment. Assuming another 13% taxes for state taxes, the year-one savings are $787,500, almost 80% of the total down payment!
How Does a Cost Segregation Study Work
By calculating the amount of short-life and long-life for a real estate acquisition. Your CPA needs this information to correctly calculate depreciation, per the IRS. It also benefits the owner as demonstrated above.
Is Cost Segregation Worth It?
Yes, without a doubt. The fee for the above study might be $5,000 to $7,000 depending on a variety of factors. Year-one tax savings of $582,750 are about 100 times the cost of the study. Where else can you obtain a 10,000% return on investment with no risk?
Some believe cost segregation only defers payment of income taxes. This is simply not true; we can prove it in a free preliminary analysis. The truth is that it reduces and defers income taxes. Depreciation is never taxed if the asset is in your estate due to the step-up in basis or if you do a 1031 exchange. Even if you sell, the depreciation recapture is mostly at the capital gains rate instead of the ordinary income rate.
See how much you can save with the free cost segregation calculator. No personal information such as name, phone number, or email address is required. Use the calculator on the right to estimate how much money you could save.
O’Connor means property tax reduction with the right attitude.
- The government wants your money.
- You earned it; it is your money.
- Let us help YOU keep more of YOUR money.