4 Asset Classifications of Cost Segregation

[Julio Gonzalez]

Have you ever found yourself having to pay into the IRS for income taxes on your real estate properties? Before sending in the check, be sure to take a look into an engineered cost segregation study to see if you could benefit and thus save money on taxes. The study analyzes your property and is able to separate the assets into their applicable useful lives, accelerating the depreciation rather than depreciating the entire property over 27.5 years. By accelerating the depreciation, you can reduce your taxable income and therefore increase your after-tax cash flow.

As part of a cost segregation study, the property is divided into 2 different categories - 1) personal property which is depreciated over a shorter useful life such as five, seven or 15 years and 2) real property which is depreciated over 27.5 years. Personal property includes objects such as kitchen cabinets and flooring. Real property includes immobile and permanent objects such as the foundation of the building.

A cost segregation study then further divides the assets into 4 classifications:

1. Land Improvements
   1. This includes fences, sidewalks, docks, curbs, etc. Land improvements are typically depreciated over a 15 year period using the double declining balance method. It’s advisable to try to maximize the assets attributed to this classification.
2. Personal Property
   1. This includes items such as fixtures, window treatments, carpeting, and furniture. Personal property is typically depreciated over a five or seven year period if using the double declining method.
3. Building
   1. This includes all of the components of the building such as the plumbing, roof, etc. Again, it is advisable to try to maximize the assets attributed to this classification as the remainder will be classified as land which is not a depreciable asset.
4. Land
   1. Essentially any asset value that could not be classified into one of the three previous asset classifications is allocated to this category. As noted above, this category is not subject to any depreciation at all - not even 27.5 years - as land does not depreciate. As such, ensure your CPA, cost segregation study engineer, or whomever is completing your study is able to allocate as much of the asset value to the other three classifications as possible for the most benefit.

If you’re a property manager or a CPA, it’s crucial that you learn more about cost segregation studies as this can be an extreme value-add to your clients.

Have you looked into a cost segregation study recently?