Unlocking Tax Savings with Cost Segregation

Tax planning can often feel overwhelming, especially for real estate owners trying to navigate complex strategies to minimize their tax liability. One highly effective yet often underutilized tool is cost segregation—a strategic approach that accelerates depreciation and significantly reduces taxable income.

Many property owners may not realize that a cost segregation study requires specialized expertise in engineering and tax law to analyze and reclassify building components appropriately. Understanding the process and its benefits can help owners make informed decisions and maximize their financial opportunities.

Understanding Cost Segregation

Cost segregation is a tax strategy that allows property owners to maximize depreciation deductions by reclassifying specific components of their buildings into shorter depreciation periods. While standard depreciation schedules dictate that residential properties depreciate over 27.5 years and commercial properties over 39 years, some assets—such as carpeting, cabinetry, and specialized mechanical systems—qualify for shorter recovery periods of 5, 7, or 15 years.

A professional cost segregation study ensures these assets are properly classified, enabling property owners to reduce taxable income and increase cash flow in the early years of ownership.

Example: Medical Office Building Cost Segregation Study

Consider a medical office building purchased for $5 million. Through a cost segregation study, our experts reclassified building components, resulting in the following allocations:

By accelerating depreciation for these components, the property owner realized a significant portion of the total $1,600,000 tax savings within the first five years, substantially enhancing cash flow and reinvestment opportunities.

Key Benefits of Cost Segregation

Property owners who leverage cost segregation can experience several significant benefits, including:

• Accelerated Depreciation: Capture larger tax deductions earlier, improving cash flow.
• Lower Tax Liability: Reduce taxable income through reclassification of eligible assets.
• Increased Cash Flow: Redirect savings into business growth and investment opportunities.
• Simplified Asset Dispositions: Easier tax reporting when assets are removed or replaced.

The Cost Segregation Process

At Sikich, we streamline the cost segregation process to make it straightforward and efficient:

1. Initial Consultation & Feasibility Analysis: Our team conducts a feasibility analysis to assess potential tax savings and provide a no-cost proposal outlining estimated benefits and fees.
2. Document Collection & Site Visit: Upon engagement, we gather relevant property documents such as blueprints and depreciation schedules. Our engineers then conduct a site visit to capture detailed property data.
3. Comprehensive Report Preparation: We provide a detailed report with asset classifications, tax citations, and a summary of results for your tax preparer to utilize.
4. Implementation & Ongoing Support: Our experts work closely with your tax advisor to ensure seamless implementation, including preparing the necessary documentation for compliance purposes.

How Long Does a Cost Segregation Study Take?

A typical study takes 6 to 8 weeks from start to finish. During peak tax season, the timeline may extend slightly, but our team is committed to timely completion.

Who Can Benefit from Cost Segregation?

Cost segregation is an excellent fit for various property types, including:

• Commercial, industrial, or residential rental properties.
• Owner-occupied business properties.
• Properties with a basis exceeding $350,000.
• Properties placed in service after 1986.

When Is Cost Segregation Not Beneficial?

While cost segregation is highly advantageous in many cases, it may not be the best fit in certain situations, such as:

• Short-Term Ownership: Selling within a few years could lead to depreciation recapture, negating benefits.
• No Taxable Income: Without taxable income to offset, accelerated deductions may not provide immediate value.
• Low Property Value: The cost-to-benefit ratio may not justify a study for smaller properties.

Choosing the Right Provider

Selecting a knowledgeable and experienced provider is crucial to ensuring a successful cost segregation study.         

Look for provider who:

1. Offer transparency in costs and expected benefits.
2. Have significant experience and expertise in tax law and engineering.
3. Utilize IRS-compliant methodologies.
4. Provide audit defense for their work.
5. Collaborate with your tax preparer throughout the entire process.

Cost Segregation and Other Tax Strategies

Cost segregation can be used alongside other tax strategies to maximize savings, such as 179D energy deductions, 45L residential credits, 1031 exchanges, and historic tax credits. A tax professional can help integrate cost segregation into a broader tax planning strategy to achieve the best results.

Take the Next Step

Cost segregation is a powerful tool for reducing tax liability and improving cash flow. Whether you are considering it for the first time or looking for a trusted partner, Sikich is here to help. Contact me today for a free consultation to explore your savings potential.

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