The Magic of a Cost Segregation Study in Milwaukee

[Julio Gonzalez]

Last year, a woman purchased a Japanese restaurant in Milwaukee, Wisconsin for $840,000. She wanted to renovate the restaurant but was concerned about the construction costs. After doing some research, she realized that a cost segregation study could not only save her money in taxes, but could also fund the renovations that she wanted done. After consulting with a real estate attorney, she learned that by getting the cost segregation study done, she also had the potential to save on insurance premium costs and property tax appeals since the study can recalculate the replacement costs for the insurance carrier.

If a Cost Segregation Study had not been performed on this $840,000 restaurant located in Milwaukee, Wisconsin, it would have had first year depreciation of approximately $21,500. Thanks to the Cost Segregation Study, the property investors accelerated the depreciation that the first year depreciation was approximately $427,200. She was able to use this tax savings to fix up the restaurant and install new computer systems so she has a new kitchen, enlarged dining room, excellent Wi-Fi and her guests are now able to order using the tablet at their table! She said it felt like magic since the cost segregation study allowed her business to reach its full potential.

The use of the accelerated depreciation strategy helps real estate investors to reduce the tax liability immediately which therefore increases their bottom line due to the offsetting of income. An additional benefit of a detailed engineering-based Cost Segregation Study is that it can increase potential insurance premium savings as well as provide support for the property tax appeals process. Additionally, it can help maximize renovations and improvements.

A Cost Segregation study is an IRS approved federal income tax tool that increases near term cash flow by utilizing shorter recovery periods for depreciation to accelerate return on investment. For newly constructed, purchased or renovated properties and also retroactive generally over the last 10 years, building components are properly classified into individual units of property and accurate recovery periods for computing depreciation deductions. The study identifies with forensic engineering detail the immediate Bonus Depreciation 5, 7 and 15-year personal property class lives qualifying portions of a building that are normally buried in 27.5 year residential or 39 year commercial categories.

As a reminder, bonus depreciation starts to phase out in 2023. It’s 100% bonus depreciation in 2022, 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and completely phased out in 2027. Remember that the bonus depreciation is based on the year of purchase/placed in service!