Cost Segregation: What Real Estate Investors Should Know

Are you an investor in real estate who owns many properties and is worried about tax time? This could be the time for you to make use of cost segregation to put your anxiety away.

Cost segregation is a way to make real estate investors save hundreds of millions of dollars of tax each year. This tax-saving technique makes use of the property's depreciation value as a loss to dramatically reduce the amount you pay in taxes at the close each year. It is particularly useful for those who own newly constructed real estate that is worth more than $1 million.

Making use of cost segregation for your benefit is possible by utilizing an experienced tax professional and a cost segregation research group, as well as this informative guide. Let's get started.

What Is Cost Segregation?

Cost segregation studies send experienced engineers to your property to help you classify depreciating components of your building. These can include everything from flooring to household appliances. The purpose of this study is to pinpoint the total cost of property-related expenses.

Typically, commercial properties depreciate over 39 years, while residential properties depreciate for 27.5 years. Personal property and improvements to land are depreciated over 5,7, or 15 years. The land itself doesn't decrease in value.

Important to keep in mind is the fact that segregation of costs represents an opportunity to reclassify property assets. Some of these properties will be able to be classified into 5 or 7 or 15-year-old depreciation value, while others will be at 39 and 27.5-year mark.

When the team responsible for cost segregation examines your property to determine the best tax codes, they'll differentiate depreciating areas of your property. After calculating the depreciation of all assets, they divide the total depreciation by an annual amount. The depreciation cost for each year will transform into a filed loss on taxes and reduce the total amount that you have to pay taxes on.

How Cost Segregation Can Help

Many would be wondering why they should break their property into tiny pieces instead of depreciating the whole structure over time. In the end, it is much simpler, isn't it?

Yes, it's true; however, it's not more advantageous for the owner of the property.

Let's say you purchase an office building worth $2 million. Because it's commercial property, the property depreciates over a period of 39 years. If you're within the tax bracket of 30% bracket, you'll save $7,700 a year by just calculating the total depreciation of your home.

Let's say you decide to take your calculated chance of investing in an expense segregation study. The skilled engineers and our tax experts can determine that the majority of what you pay for your home could be considered assets that will depreciate over the course of five years, which is quite a leap from the 39 years that you initially worked with.

In this scenario, 50 percent of assets is equal to $500,000, so one-half million dollars are put on a 5-year depreciation schedule with the identical tax rate of 30 percent. You can save as much as 30k per year for the first 5 years you own the property.

You can look forward to over $22,000 savings per year compared to the depreciation strategy you apply.