What is a Cost Segregation Study and how does it benefit a property owner?
?While most rental property investors are aware that the IRS allows depreciation on residential rental properties over a 27.5-year period and commercial & industrial properties over 40 years.
?What very few investors know is that the IRS also allows an alternative to straight-line depreciation, that accelerates depreciation, known as a Cost Segregation Study.
?Cost Segregation is a dynamic IRS-approved method to accelerating depreciation on investment properties, dramatically reducing taxable income, and dramatically reducing tax liability.
When done correctly, qualified studies combine Construction Cost Professionals ?and Tax Specialists working together to identify, quantify, and classify numerous components within your property into their depreciable classes. By breaking down a property’s costs into shorter-lived assets, investors can accelerate depreciation resulting a reduction in their taxable income.
?What types of properties qualify for a Cost Segregation Study?
The short answer is almost all properties being utilized as rentals: Single Family Homes, VRBO & AirBnB properties, multi-family apartments of all sizes and configurations, retail, commercial, industrial, mixed use.? As you can see, almost all types of properties qualify.
?How can a REALTOR use a Cost Segregation Study for their rental property listings?
?In a world where the multi-family real estate market is driven by Gross Income, ?Interest and Cap Rates, it becomes increasingly difficult to set your listing apart from others.
Listings just sit, the DOM increases, and most multi-family listing go through one if not more “price adjustments”, or other Seller concessions before they finally get sold.
Cost Segregation Studies are a proven solution that act as a catalyst to move your listings ahead of the competition and get your listings sold.
By sharing a Cost Segregation Study on your listed property with a potential Buyer, the Buyer will be able to see the accelerated depreciation and actual tax savings they will benefit from when they purchase the property. ????
Employing this tool in your Sales arsenal ?brings dramatic results to your sales cycle, Client retention and satisfaction. ?In short, you’ll be a Hero.
?Are there any pitfalls, or things to watch out for in a study?
?The IRS in its 268-page publication entitled,?“Cost Segregation Audit Technique Guide”, categorizes a number of Methodologies that studies can fall under.? Unfortunately, not all Methodologies are equal in the eyes of the IRS, leaving the client with almost certainty with an Audit of their Tax Return.?
One of those methods is the “Rule of Thumb” approach, which effectively takes the entire cost basis of your property and divides it into random amounts to do their “study”.? This doesn’t reflect the actual cost data that the IRS is looking for.? It results in amounts on your depreciation schedule that can’t be substantiated, and an invitation from the IRS to join an “Audit Ball” to be given in your honor.
?What Methods should a proper study use, and what determines a “Complete Study”.
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?There are two methodologies that meet the highest level of compliance to the IRS standards.
?1.?????? ?Detailed Engineering Approach from Actual Cost Records. The use of actual cost records in the first approach contributes to the overall accuracy of cost allocations and is generally applicable only to new construction; where detailed direct cost information (from contractors, suppliers, etc.) and indirect cost information (from consultants, local building departments, etc.) is readily available.
2.?????? ?Detailed Engineering Cost Estimate Approach.
The Cost Estimate Approach is used when cost records are not available, such as with an existing property. In this context, additional steps must be taken to determine the values of the acquired assets, such as addressing physical depreciation and functional obsolescence.
?A complete study includes:
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What’s an Example of a typical Cost Segregation Study?
?An example of comparing straight line depreciation to the refined results of a “Cost Segregation Study”, a recent study on a single-family rental property in Southwest Florida with a “Cost Basis” of $550,000 using a straight-line method reflects a first-year depreciation of $9,000. That same home through a Cost Segregation Study reflects a first-year depreciation of $155,000.? If that property owner was in a 32% tax bracket, their actual tax savings would be $49,600. The even better news (as if this wasn’t enough) is that the allowable depreciation carries forward to subsequent tax years.? The even better, better news is the Cost of the Study is just a fraction of your actual tax savings.
?So, who is Cost Seg Property LLC, and why should we use you?
?Cost Seg Property LLC is a firm with integrity and conviction whose goal is to positively impact the financial portfolio of real estate investors. Our highly qualified team of sales specialists, construction analysts, and tax specialists, work synergistically to provide an IRS compliant accelerated depreciation report. With 20 years of experience in the production of cost segregation studies and 80 years of combined construction experience, you can be fully confident when you engage our team.
Our firm's reports adhere to the highest degree of documentation, analysis, and precision cost detailing, out of the various methodologies that the IRS recognizes we only utilize the two methodologies that reflect costing data and report content that are recognized by the IRS.
Cost Seg Property LLC's adherence to these two methodologies is the basis for our motto:
PRECISE ANALYSIS = MAXIMUM RETURN.
Because of our high standards, we offer free audit protection. In the unlikely event you are audited by the IRS, we will represent you in that audit. Please feel free to click the above link to find out more.?