How do you leverage cost segregation studies to optimize your depreciation deductions?

1 What are cost segregation studies?

Cost segregation studies are specialized analyses that identify and separate the components of your property that can be depreciated faster than the building itself. These components include land improvements, personal property, and certain building systems. By segregating these costs, you can accelerate your depreciation deductions and reduce your taxable income.

2 How do cost segregation studies work?

Cost segregation studies are performed by qualified engineers, appraisers, or accountants who inspect your property and allocate the costs to different asset categories based on their useful lives and tax rules. These categories range from 5-year property (such as furniture, fixtures, and equipment) to 39-year property (such as the building structure). The result is a detailed report that shows how much of your property cost can be depreciated over shorter periods.

3 How do you leverage cost segregation studies?

To leverage cost segregation studies, you need to apply the results to your tax returns and claim your depreciation deductions accordingly. You can do this in the year you acquire or construct your property, or in a later year by filing a change in accounting method. Either way, you can benefit from the increased cash flow and lower tax liability that cost segregation studies provide.

4 What are the benefits of cost segregation studies?

Cost segregation studies offer a range of significant and long-lasting benefits. Accelerating your depreciation deductions can increase your cash flow by deferring taxes, enhance your return on investment by improving your net present value, reduce your alternative minimum tax exposure by shifting income from passive to active sources, create tax credits by identifying energy-efficient or renewable energy assets, and simplify your property disposition by separating personal property from real property.

5 What are the challenges of cost segregation studies?

Cost segregation studies come with several challenges, such as a substantial upfront investment in hiring a qualified professional and the need for thorough documentation and record-keeping of the cost allocation and depreciation schedules. Additionally, it is important to carefully comply with the IRS rules and regulations, as failure to do so could result in an audit risk.

6 How do you choose a cost segregation provider?

Choosing a cost segregation provider is a critical decision that can have a major impact on the success of your cost segregation study. Look for a provider that has extensive experience and expertise in commercial real estate and cost segregation, as well as offers a comprehensive and customized service tailored to your needs and goals. Additionally, make sure they provide a clear and detailed proposal that outlines the scope, timeline, and fees of the project. The provider should also deliver a reliable and accurate report that meets IRS standards and guidelines, while supporting you throughout the process and after the delivery of the report.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?