What is Cost Segregation?
Cost Segregation is a strategy that investment real estate owners utilize to mitigate their tax liabilities through accelerated depreciation. Accelerating depreciation leads to higher deductions, thereby reducing the amount of income tax for the current year (and possibly future years) and improving cash flow.
Without a Cost Segregation Study, a property is typically misclassified as a single “real property” asset, which for a commercial buildings equates to a tax life of 39 years. In the case of residential rental buildings, the assets are depreciated over 27.5 years. Cost Segregation corrects this misclassification by identifying assets that a property actually consists of and then organizing them into Units of Property (electrical system, plumbing system, HVAC system, for example) and then by tax life. This organization results in assigning the correct, often shorter, tax recovery periods (often 5, 7, or 15 year tax lives).
By reducing the recovery period, a taxpayer benefits by fully depreciating the asset over a shorter period of time, resulting in an increase in the deductions in the year the study is implemented.
At it’s core, Cost Segregation is an opportunity cost strategy: the money that is saved with a lower tax bill today is more valuable than that same amount saved in the future since you can put it to work, invest it, and grow it. Additionally, as the cost of living grows over time, a dollar in your pocket is worth more today than it will be “tomorrow”.
Frequently Asked Questions
What types of real estate transactions are eligible?
– New Construction
– Tenant Improvements
– Renovations
– Acquisitions
– 1031 Exchanges
– Inherited Properties
What types of properties or industries are eligible?
– Apartments
– Auto Dealerships
– Car Washes or Service Centers
– Casinos
– Cold Storage Facilities
– Distribution Warehouse
– Farmland
– Gas Stations
– Golf Courses
– Hotels
– Hospitals
– Industrial Flex
– Manufacturing Facilities
– Medical Buildings
– Offices
– Rental Homes/Condos
– Restaurants & Bars
– Retail Strip Plazas
– Shopping Centers
– Single Family Houses
– Supermarkets
– Veterinary Clinics
– (If you are reading this, any investment real estate qualifies – commercial and residential!)
I purchased a property in 2015 (or in a prior year), can I have a Cost Segregation Study done?
A retroactive study can technically go as far back as 1987. The beauty of a Cost Segregation Study is that you will not need to amend prior tax returns; all that is needed is an accounting form filed with the current year’s tax return. However, the benefit of a Cost Segregation Study is largely dependent on how much building basis is left to depreciate (remember every year there is an automatic straight-line depreciation), so every year that passes, the benefit lessens.
A good rule of thumb are properties that qualify for a substantial benefit are those that were placed in service max of 10-15 years ago.
When should I contact my tax preparer?
We work directly with your tax preparer (accountant, CPA, enrolled agent, etc.) so having them on board with a Cost Segregation Study is crucial to the process. If preferred, once a complimentary benefit estimate shows promise, that would be the best time to involve your tax preparer. And we can be on the call if they have any questions.
How much does a study cost?
A Cost Segregation Study ranges in price depending on the amount of work needed to complete the study. Since each project is unique, an assessment needs to be made to price each engagement. GTG Consulting provides a complimentary benefit estimate that will also include the fee.
How do I know if this is right for me?
Many businesses and individuals qualify for a Cost Segregation Study but it may not fit their current tax situation. Consulting with us and your tax preparer helps to determine if this is right for you. At GTG Consulting, we will not hesitate to be the first to let you know if having an analysis performed would not make sense in your current circumstance.