Are you a real estate investor looking to reduce your tax liability and save money on taxes? Engaging with cost segregation services may be an excellent strategic strategy for lowering your IRS tax if this is the case. This financial tool can help you improve your cash flow and raise the profitability of your assets. Cost segregation studies or CSS on your property investments may result in thousands of dollars in tax savings through accelerated depreciation deductions.
We are aware that investment experts and taxpayers are continuously looking for opportunities to reduce their tax liabilities. Cost segregation analysis is one of the numerous valid strategies for lowering your overall tax burden, leading to substantial savings and improved cash flow for you to savor.
This article will outline the steps necessary to conduct high-quality cost segregation research. Additionally, you can learn how to minimize taxes (both federal and state tax) on any commercial property you own.
Let us get down to the basics first – what is cost segregation? CSS or cost segregation study is a tax-saving method that enables property owners to accelerate the deduction of certain depreciation costs. Commercial real estate investors who have acquired, refurbished, constructed, or developed real estate are eligible for various tax benefits. A CSS classifies non-structural elements as those that can be depreciated more quickly.
Generally, depreciation schedules have allowed for real estate depreciation over a 27 and a half or 39-year period. On the other hand, accelerated depreciation deductions will enable you to depreciate particular assets or components quickly in five, seven, or fifteen years. Segregating acceptable real estate costs in this manner can result in significant savings for commercial property investors.
You can easily have access to calculators that can assist you in determining if and how much assistance you may be eligible for. With the help of tax professionals, take advantage of tax rules will save a lot on depreciation deductions while increasing cash flow.
Is it Beneficial to Use Cost Segregation Services?
Cost segregation study of commercial real estate is worthwhile if it results in a reduction in taxable revenue. Of course, one of the primary benefits is increased cash flow. However, applying a cost segregation technique is worthwhile only if the study is prepared by tax professionals knowledgeable about property tax legislation.
Let us take a closer look at how a cost segregation study could benefit your business.
Cost segregation can help you improve your cash flow
The purpose of analyzing property rehabilitation, building, acquisition, and enhancement expenses is to reduce taxable income. This means that less of your money will be used to pay for the local, federal, and state taxes. The enormous savings you can gain result in higher cash flow and revenue.
Savings on taxes due to accelerated depreciation
The expense of a segregation study can quickly be recouped in tax savings. Tax professionals compare the money spent on construction or acquisition charges to depreciable assets classified as the owner’s property.
By and large, all components that qualify as personal property are subject to depreciation over a five- or seven-year period. Operating costs on the improvement of the land could be depreciated over 15 years. You can save considerable amounts of money on taxes by accelerating depreciation for shorter-lived assets. Additionally, there is bonus depreciation, which can result in even more significant savings.
What Are the Benefits of Cost Segregation Services?
A cost segregation study assesses all construction-related expenses that are eligible for accelerated depreciation. These real estate expenses are incurred in connection with personal property assets. A cost segregation analysis includes the following components:
- The non-structural components of a building
- Enhancements to the land
- Costs associated with indirect construction
- Personal property assets are those that are not required for the operation and maintenance of the building. These may include furniture, household goods, machinery, and vehicles.
- Tax-deductible improvements to real estate include parking lots, pathways, gates, driveways, and landscapes. The IRS states that you can divide landscape features into several categories under the cost segregation tax rules, such as security lights, plants, trees, and stones.
- Indirect construction expenditures that are not directly related to the project’s cost include architectural fees, waste collection, structure appraisals, and construction services.
Case Studies in Cost Segregation Examples in Real Property
Examples in real property might assist in illustrating the tax savings associated with cost segregation.
All property costs are deducted over 27.5 years for all residential rental properties and 39 years for commercial buildings without cost segregation. Consider the tax savings that could result from conducting a cost segregation analysis.
Assume the cost of an apartment building is $1.4 million. Under a typical long-term depreciation plan, the first year’s depreciation would be around $30,246. However, if you break down the components of the building, the property owner can gain significant savings.
Cost segregation can lead to significant tax savings during the first year as follows:
Reclassification of furnishings and personal assets at a rate of 20.25 percent resulting in annual savings of $284,088.59 for the first five years.
Land improvements are reclassified at a rate of 2.47 percent, resulting in an annual savings of $34,694.98 over the first 15 years.
The remainder of the facility is depreciated at a rate consistent with industry standards over 27.5 years. This equates to a savings of $1,643.10 each year for 27 years.
You can see how, with the help of a cost segregation specialist, you may boost cash flow by speeding up tax depreciation deductions in the first 5 and 15 years. The property owner in this situation has more than $330,400 in the first-year depreciation. This equates to a first-year tax savings of more than $290,000.
How Much is the Cost Segregation Study?
The fee of a segregation study varies according to the style of building, the size of the property, and other criteria. Segregating expenditures and expenses is frequently successful for structures valued at more than $500,000. However, tax professionals can assist you in determining if it is worthwhile to investigate the cost segregation benefits of commercial real estate or residential rental property.
A CSS can be arranged at any point following the purchase, renovation, or construction of a commercial property. However, the best period to investigate the feasibility of cost segregation is within the first year. This simplifies the process of obtaining the relevant papers for conducting a thorough examination and inspection.
Cost Segregation Services: In Conclusion
Cost segregation is a critical strategic tax savings method for reducing IRS tax liability. Separating costs related to the construction and operation of the building from those involved with non-structural features can result in thousands of dollars in savings within the first few years. To learn more about how your business can benefit from this, we recommend speaking with tax professionals who can assist you in saving money and increasing your cash flow and earnings.
