What Is Cost Segregation?

Cost segregation allows us to identify components of a piece of real estate and depreciate those components faster than we normally would.

A long term residential rental property depreciates over 27.5 years and a non residential property depreciates over 39 years. The land does not depreciate at all. The cost segregation study allows us to examine a real estate property and identify items we reclassify as short-life assets.

Examples include a refrigerator, TV, linens, beds, kitchen supplies, pool tables, cabinetry, crown molding, ceiling fans, blinds, driveways, retaining walls, and swimming pools. These are personal property or land improvements that qualify as five-year-life property or fifteen-year-life depreciable property.

Once we identify these items, bonus depreciation allows us to write off anything with a 20-year life immediately in year one on our federal income tax returns.

How Bonus Depreciation Accelerates Cash Flow

Instead of writing off less than 3 percent in year one, cost segregation studies usually allow around 20 to 30 percent of the purchase price to be written off. Some factors allow as much as 50 percent of the purchase price to be written off in the first year.

Driveways, swimming pools, cabinetry, carpets, office desks, TVs, linens, furniture, blinds, and other personal property can be written off immediately when identified in the study.

When Do We Want to Do a Cost Segregation Study?

The most common instances when we want to do a cost segregation study include:

1. Long-Term Rentals with Real Estate Professional Tax Status

This allows non-passive losses to offset W-2 or business income when the investor materially participates.

2. Short-Term Rentals

If the average length of stay is less than 30 days and you materially participate, the losses can offset W2 income or business income.

Short-term rentals typically write off 30% because they include beds, TVs, couches, and personal property.

3. Offsetting Capital Gain Events

Losses from one rental property can offset the capital gain from selling another property.

4. Offsetting Positive Cash Flow

A cost segregation study can create a loss that offsets profits.

5. Business Owners Who Own the Real Estate Where They Work

You do not need a real estate professional tax status. The loss created offsets profits from the business.

To discuss the best timing for your property, reach out here: Contact Specialty Tax Group

Frequently Asked Questions About Cost Segregation

How much can I save?

A single filer can offset up to $313,000 of income. Married filing jointly can offset up to $626,000.  Business owners can offset 100 percent of business profits.

Can I do a study after year one?

Absolutely. You can wait until the best year and take catch-up depreciation.

Is cost segregation only for new properties?

Absolutely not. It does not have to be new construction, and it does not have to be performed in the first year.

What if I sell the property after doing a study?

Depreciation recapture requires planning. Strategies include 1031 exchanges and creating losses to net against it.

What types of properties qualify?

Any type of real estate with improvements qualifies. This includes:

• Multifamily
  
  
• Single family
  
  
• Self storage
  
  
• Restaurants
  
  
• Stadiums
  
  
• Stores
  
  
• Office buildings
  
  
• Warehouses
  
  
• Parking lots
  
  

The most important factor is whether the study will create enough tax deductions to justify the investment.

If you are ready to evaluate the opportunity for your property, schedule a consultation with 

Specialty Tax Group: Contact Us Here