Cost Segregation is an Important Tool for Commercial Property Owners

[Julio Gonzalez]

What is Cost Segregation?

A cost segregation study is a strategic tax planning tool that separates the assets that have a shorter useful life and can be depreciated over 5, 7 and 15 years from the residential rental property or nonresidential real property that are depreciated over 27.5 and 39 years, respectively. By accelerating your depreciation schedules, you reduce your taxable income which in turn increases your operating cash flow. This also allows for property owners to more easily write-off assets that get damaged/destroyed as the value of these assets is determined as part of the study. You will receive a report as a result of the cost segregation study that supports the breakout between asset classes and new depreciation schedule in the event that you are audited by the IRS.

Tax Concerns for Commercial Properties

A very big tax concern for commercial property owners are the depreciation schedules. Depreciation is utilized to determine the tax deductions that are available for a property, thus improper documentation of depreciation or calculation could result in a significantly larger tax bill for a property owner.

If the property owner classifies the entire property as real property, the depreciation schedules are longer and result in lower tax deductions in the short-term than those that utilize a cost segregation study to reclassify specific components to personal property.

How a Cost Segregation Study Could Help

A cost segregation study can help property owners identify certain building components that are eligible for accelerated depreciation, thus reducing their tax liability and increasing their available cash flow. A cost seg study also can provide very valuable information about the property or building’s maintenance and repair costs, energy efficiency, cost overruns for construction, and more. This allows property owners to make more informed decisions in the management of their property.

Bonus Depreciation

Bonus depreciation is a tax provision that is designed to stimulate investments in new and existing real estate properties by reducing the taxpayers tax burden on said real estate investments. It does this through allowing the property owners to claim additional depreciation in the first year placed into service.

Placed into service September 27, 2017 - December 31, 2022 - 100%

Placed into service in 2023 - 80%

Placed into service in 2024 - 60%

Placed into service in 2025 - 40%

Placed into service in 2026 - 20%

Case Study Examples

Medical Office

This medical office was purchased for $2.3M. With a cost segregation study, the depreciation was accelerated from $2,488 to over $1M in year one.

Have you considered a cost segregation study for your medical office, multi-use property, storage-facility, office building, retail space, industrial site, car dealership, dentist office, winery, etc.?