About Cost Segregation
Cost Segregation is an IRS-endorsed method used to expedite depreciation on a real estate asset by distinguishing non-structural personal assets and land improvements from real property assets.
Typically, buildings are subject to depreciation over either a 27.5-year (for residential properties) or a 39-year (for commercial properties) period, determined by their classification as Section 1250 property. However, specific asset categories within a building may qualify for accelerated depreciation over five, seven, or 15 years upon reclassification as Section 1245 property.
This encompasses non-structural personal assets, land improvements, leasehold improvements, and indirect construction costs, where applicable. Segregating these assets with accelerated depreciation into their respective categories enables the frontloading of relevant tax deductions, thereby reducing initial payments and enhancing cash flow.
Why use cost segregation?
By conducting a cost segregation analysis on an investment property or property owned for business purposes, the owners can:
Increase the depreciation deductions for income taxes.
Recover missing accelerated depreciation deductions from prior years.
Boost the cash flow
Establish an audit trail
Why use cost segregation?
By conducting a cost segregation analysis on an investment property or property owned for business purposes, the owners can:
Increase the depreciation deductions for income taxes.
Recover missing accelerated depreciation deductions from prior years.
Boost the cash
flow
Establish an audit
trail
The advantages of a cost segregation study can be substantial, even though tax savings vary depending on the individual's overall tax status and the particular assets in each property.
After managing tens of thousands of projects and studies, we project that for every $1 million in reclassified assets, you can save about $275,000 in Net Present Value tax savings. Additionally, since most states adhere to federal depreciation regulations, you can also save money on state tax returns.
The Tax Cuts and Jobs Act of 2017 (TCJA) has resulted in recent tax law amendments that have further enhanced cost segregation.
The federal tax incentive known as bonus depreciation, which permits businesses to instantly deduct a substantial portion of the acquisition price of qualified assets, was raised from 50% to 100%. This effectively permits real estate investors to immediately expense any property that is less than 20 years old. Any costs that meet the requirements of the new bonus depreciation regulations will be segregated through a cost segregation study created by LABC Cost Segregation.
Who is capable of segregating costs?
LABC Cost segregation studies are carried out by accounting and engineering specialists who have extensive real estate analysis knowledge.
Their identification and reclassification of eligible assets to shorter recovery periods is critical to decreasing tax liability as a result of accelerated depreciation on certain assets.
They identify the assets, appraise their value, and calculate the tax deductions for depreciation in accordance with FASB (Financial Accounting Standards Board) principles. Upon completion, documentation is provided to substantiate the results, which are then filed with the asset’s depreciation schedule.
When should you implement cost segregation?
Cost segregation is best done before filing the initial depreciation schedule for an asset. This occurs immediately following the purchase of a newly acquired facility or when a construction project is completed and put into service.
However, missing depreciation for previous purchases, construction, expansions, and restorations can be recovered later through a cost segregation analysis. In such circumstances, it is unnecessary to modify previously filed tax returns. “Catch-up” depreciation can be claimed in a single year by submitting Form 3115 (Change in Accounting Method).
Questions? Not Sure If You Qualify?
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Active Investor with Multiple Properties
You are an active real estate investor who owns one or more investment properties.
Brick-and-Mortar Entrepreneurs
Business Owners who own a brick and mortar location or office space.
Short Term Rental / Vacation Rental Owners
If you own a secondary residence that you rent on AirBnB / VRBO or similar sites, you qualify.
Real Estate
Professionals
If you or a spouse qualify as a Real Estate Professional under IRS guidelines, you qualify.