It has long been a question that has puzzled many commercial property owners. Many accountants suggest it, but it’s worth is still rarely clear.
Many owners barely even understand how it operates and is thus unable to determine its worth. As that’s the case, we’ll thoroughly explain what it is and what’s it for, but more importantly, whether or not it is worth it in the overall picture.
What Is Cost Segregation?
First of all, cost segregation is used by commercial real estate owners to reallocate property into personal property, to achieve accelerated depreciation methods and a shorter depreciable tax life.
It is a practice that involves determining the exact assets an owner has and their costs, then classifying them for federal taxes.
By using cost segregation analysis, you get the chance to determine which of your building’s costs that were classified with a 39 years depreciable life could now count as personal property or land improvement, subject to a 5, 7, 15, or 27.5 (for residential and multi-family buildings) years depreciation rate.
All of your assets that get a new classification will enable you to defer taxes and reduce your tax burdens.
The benefits of cost segregation are thus:
- Deferral of taxes
- Ability to reclaim depreciation deductions from past years
- Lower tax liability
- Subsequent higher revenues
Looking at the benefits it provides, cost segregation is worth it. However, we still need to take a look at what’s involved and how much it costs to determine with absolute certainty its actual worth to a property owner.
Is Cost Segregation Really Worth It?
Cost segregation does save money on taxes, but it still costs. Let’s take a look at what’s involved.
Most importantly, to do a cost segregation study, you need a specialist. The IRS requires an engineering-based cost segregation study for all properties if you want to get the benefits depreciation involves.
You need to hire the services of cost segregation specialists who need to perform a detailed study and then provide the insights to your accountant. They will then be able to determine whether or not your property meets the IRS regulations.
All of this is necessary as the IRS deems it’s essential for cost preparation studies to be done using knowledge of both the construction process as well as tax law for that specific property.
The Bottom Line
Cost segregation analysis involves a lot of work, and you need to hire certain specialists to perform it. However, a vast number of assets can end up being classified in a different manner which allows for shorter depreciable tax life and accelerated methods of depreciation.
All of that reduces the taxes you pay on those assets and ends up saving you a lot of money in the long run.
Cost segregation is a relatively unknown method to many owners but based on all that we’ve seen in this article — it’s worth is definitive and is thus one of the most valuable tax-saving strategies commercial property owners can use.