Is time running out to get a cost segregation study?

[Julio Gonzalez]

What is cost segregation?

In simple terms, a cost segregation study will permit real estate owners to both accelerate depreciation and significantly increase the deductions by utilizing bonus depreciation. A cost segregation study identifies personal property assets that are otherwise depreciated as one group with real property assets, such as a building. Thus, rather than depreciating these assets over 27.5 years for residential rental or 39 years for commercial real estate, these assets can be depreciated over 5 to 7 years for personal property and 15 years for land improvements.

Why is time running out?

Under TCJA (the Tax Cuts and Jobs Act of 2017), there is a declining scale as to how much bonus depreciation can be recognized in the year the property was purchased. 2022 is the last year in which 100% bonus depreciation is applied. 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and 0% for 2027 and after. Again, bonus depreciation can only be applied to the property in the year that you purchased it and taxpayers can no longer claim bonus depreciation retroactively.

What is the benefit of a cost segregation study?

This is a question that I get asked all the time. Does the cost segregation study pay for itself? Is it really that beneficial? The short answer is yes. Let’s say that the cost segregation study costs you $7000. That $7000 fee yields a net present value benefit of $250,000. You just received a 35x return on investment. I’d say that was a wise use of your capital outlay.

What are the next steps?

Cost segregation studies can be very complex. Especially when you take into account all of the documentation required in the event of an IRS audit. If you decide to implement a cost segregation study, its very important to understand the legal status of the study, process for undertaking the study, property classifications, which property is best and worst for cost segregation studies, costly mistakes in studies, etc. If you’re interested in a cost segregation study for your residential, rental or commercial property, most cost segregation study companies offer a free cost-benefit analysis quote.