Cost Segregation Study

For taxpayers who own real estate, a cost segregation study can be a valuable tax strategy to accelerate potential tax deductions.

A cost segregation study is an analysis performed by qualified professionals, typically, performed by engineering or accounting firms to identify a property’s individual depreciable components and then assign the appropriate depreciable value to each component. Without a cost segregation study, taxpayers often estimate each component's depreciable value, potentially underutilizing their available depreciation deductions.

Depreciation for federal income tax purposes requires selecting the appropriate depreciation method and recovery period for each property component. Cost segregation studies help allocate the overall cost of real estate into individual depreciable components, ensuring compliance with federally approved depreciation methods.

Benefits of a Cost Segregation Study

The primary benefit of cost segregation studies is the ability to accelerate a property's depreciation. Buildings are typically depreciated over 39 years for commercial real estate or 27.5 years for residential real estate. However, a cost segregation study breaks down a property's components between assets such as land improvement, furniture and fixtures, and equipment, which generally have shorter recovery periods and qualify for accelerated depreciation.

By identifying assets with shorter recovery periods and applying accelerated depreciation methods, taxpayers can significantly increase depreciation deductions during the early years of property ownership. This approach not only reduces taxable income but also boosts current cash flow by optimizing the timing of tax deductions.

Is a Cost Segregation Study right for you?

If you own real estate properties or are considering purchasing one, a cost segregation study can be a powerful tool to accelerate tax deductions and enhance cash flow. However, real estate tax laws are complex, and not everyone will benefit from conducting such a study. It’s important to evaluate other tax rules that could impact your ability to claim these deductions before committing to a cost segregation study.

Key tax rules that may limit deductions include:

• Passive loss rules

• Active participation rules

• $25,000 loss limitation

• Material participation rules

• At-risk rules

  
  

These topics will be covered in greater detail in future articles.

If you'd like to learn more about cost segregation studies or determine whether they might be a good fit for your situation, feel free to reach out to us for a detailed discussion.

Disclaimer: This post is for informational purposes only and should not be considered tax, legal, or financial advice. Every individual's financial situation is unique, and tax laws are complex and frequently change. Please consult a qualified tax advisor or attorney for guidance tailored to your specific circumstances.