Are you a commercial property owner or investor? If so, you may be missing out on significant tax savings by not utilizing a Cost Segregation Study.
Cost segregation studies serve as a tax planning method that enables property owners to expedite depreciation deductions, leading to decreased taxable income and ultimately, lower taxes.
In this article, we’ll explore the benefits of cost segregation studies and how they can help you save money on your taxes.
What is a Cost Segregation Study?
A cost segregation study is a detailed analysis of a commercial property’s assets to identify and reclassify personal property assets that can be depreciated over a shorter period of time. This allows for a faster depreciation schedule, resulting in larger tax deductions in the earlier years of ownership.
How Does a Study Work?
by Aaron Burden
A cost segregation study is typically performed by a team of engineers and tax experts who will conduct a thorough review of your property’s assets. They will identify assets that can be reclassified as personal property, such as carpeting, lighting fixtures, and landscaping, which can be depreciated over a shorter period of time.
The study will also determine the value of these assets and allocate them to the appropriate depreciation schedule. This results in a higher percentage of assets being depreciated in the earlier years of ownership, providing significant tax savings.
Benefits of Cost Segregation Studies
Increased Cash Flow
By accelerating depreciation deductions, cost segregation studies can provide immediate tax savings and increase cash flow for property owners. This can be especially beneficial for new property owners who may have significant capital expenditures in the first few years of ownership.
Lower Tax Liability
Lower taxable income means lower taxes. By utilizing cost segregation studies, property owners can reduce their tax liability and keep more money in their pockets.
Improved Tax Planning
Cost segregation studies can also provide valuable tax planning opportunities. By accelerating depreciation deductions, property owners can offset other sources of income and potentially lower their overall tax rate.
Faster Return on Investment
For commercial property investors, cost segregation studies can provide a faster return on investment. By reducing taxable income and increasing cash flow, investors can see a quicker return on their initial investment.
Compliance with Tax Regulations
Cost segregation studies are fully compliant with tax regulations and are recognized by the IRS. This means that property owners can take advantage of these tax savings without worrying about any potential legal issues.
Who Can Benefit from Cost Segregation Studies?
Cost segregation studies can benefit a wide range of commercial property owners and investors. Some examples include:
- Real estate developers
- Hotel and resort owners
- Office building owners
- Retail store owners
- Restaurant owners
- Medical facility owners
- Manufacturing facility owners
If you own or invest in any type of commercial property, a cost segregation study could provide significant tax savings.
How to Get Started with a Cost Segregation Study
The first step in getting started with a cost segregation study is to consult with a qualified tax professional. They can help you determine if a cost segregation study is right for your property and guide you through the process.
Once you have decided to move forward with a cost segregation study, the process typically involves the following steps:
- Property Inspection: A team of engineers and tax experts will conduct a thorough inspection of your property to identify assets that can be reclassified.
- Asset Valuation: The team will determine the value of the assets and allocate them to the appropriate depreciation schedule.
- Report Preparation: A detailed report will be prepared outlining the findings of the study and providing a breakdown of the assets and their values.
- Tax Filing: The results of the cost segregation study will be used to file an amended tax return, resulting in immediate tax savings.
Real-World Examples of Cost Segregation Studies
Hotel and Resort Owner
A hotel and resort owner purchased a property for $10 million and allocated $2 million to personal property assets. By utilizing a cost segregation study, they were able to accelerate depreciation deductions and save $500,000 in taxes in the first year of ownership.
Office Building Owner
An office building owner purchased a property for $5 million and allocated $1 million to personal property assets. By utilizing a cost segregation study, they were able to accelerate depreciation deductions and save $250,000 in taxes in the first year of ownership.
A restaurant owner purchased a property for $2 million and allocated $500,000 to personal property assets. By utilizing a cost segregation study, they were able to accelerate depreciation deductions and save $125,000 in taxes in the first year of ownership.
Cost segregation studies are a valuable tax planning tool for commercial property owners and investors. By accelerating depreciation deductions, they can provide immediate tax savings, increase cash flow, and improve tax planning opportunities. If you own or invest in commercial property, it’s worth considering a cost segregation study to see how much you could save on your taxes. Consult with a qualified tax professional to determine if a cost segregation study is right for you and get started on maximizing your tax savings today.