As the owner of commercial property, you likely are tasked with a number of financial obligations when it comes to maintaining or making improvements to the building or land you purchased. You want to preserve the value and make a return on your investment. So if you have the opportunity to save significant tax dollars when it comes to paying your income taxes, wouldn’t you seize it?
What is Cost Segregation?
One way of reducing your tax obligation and increasing your cash flow is through cost segregation, an IRS-approved method of reclassifying property components and improvements to commercial or residential rental buildings.
Cost segregation is the process of identifying parts of real property that can be depreciated over shorter periods of time than the normal rate. This means you can take a larger federal tax deduction—particularly in the year of and immediately following the study.
More specifically, cost segregation allows you to take tax deductions – based on an accelerated depreciation schedule – such that you can take those deductions in either the first five or seven years for personal property, or 15 years for land improvements, rather than the typical 27.5 or 39 years.
It is possible that up to 40 percent or more of the cost of your building may be able to be reclassified, potentially representing hundreds of thousands of dollars in accelerated tax deductions! Better yet, in 2014, the IRS approved favorable tax law changes to its tangible property regulations - changes that can add significant value for you now and in the future.
Why Do a Cost Segregation Study?
A cost segregation study breaks down your building into multiple structural components to determine their individual values, which is important under tangible property regulations. Without cost segregation, a building owner will claim deductions over a very long period of time on the entire cost of the property.
A cost segregation study benefits the property owner by identifying the percentage and dollar amount of property being depreciated over 27.5 or 39 years that can be reclassified into shorter lives of 5, 7 or 15 years, thereby speeding up tax deductions. Moreover, a cost segregation study can identify qualified property with a depreciable life less than 20 years that may qualify for 30-50% bonus deprecation. Bonus deprecation allows the owner to write off 30-50% of the property value in the year of purchase and depreciate the rest over the shorter life as determined by the study.
The cost segregation team at BeachFleischman will help you quantify the amount of tax savings you could receive and determine if any obstacles may prevent you from realizing the full effect of the increased tax deductions. Our next blog will provide more information on the benefits and timing for achieving maximum tax savings through a cost segregation survey.