The Benefits from Cost Segregation on Opportunity Zones

[Julio Gonzalez]

Investments in Opportunity Zones can offer great tax benefits, but when combined with a cost segregation study, the benefits can multiply.

An Opportunity Zone are areas that struggle with poverty and lack the necessary access to economic opportunities. There are over 8,700 zones across the U.S. Investing in these areas comes with multiple tax benefits such as:

1. Tax-free growth
2. Tax payment deferral
3. Tax discount for long-term commitment

Additionally, investors can feel great about investing in struggling areas and stimulating economic growth in these areas.

The investments must be owned by an Opportunity Fund. For more information, see the article linked.

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.

Cost segregation studies also have multiple benefits including:

1. Accelerated depreciation
2. Tax deferral
3. Increased cash flow

Remember, that cost segregation is not a tax benefit to reduce your lifetime tax burden, but instead shifts when you pay those taxes to help implement more efficient investment/portfolio growth strategies. For more information, see the article linked.

So what can be gained by utilizing both strategies?

1. Boost cash flow early on: Cost segregation allows you to increase your current cash flow because by reducing your current tax bill, you have more money that can be put to work. This money can be reinvested in opportunity zones or used to enhance your current properties.
2. Maximize the 10-Year Exclusion: Opportunity Zones regulations exclude capital gains generated by your investment from any taxation. Cost segregation lowers your property’s tax basis meaning you’ll have less basis to recoup when you sell the property.
3. Check the box on “Substantial Improvement”: One thing that Opportunity Zones require is “substantial improvement” by improving your property by 50% or more of its purchase price. A cost segregation study can reduce the basis of the building making the amount of substantial improvements needed far less.
4. Utilize bonus depreciation: Substantial amount of qualified or new property costs can be depreciated immediately rather than depreciated overtime.
5. Minimize future tax liability: If there are no changes to the legislature around Opportunity Zones, investors may have a large tax bill due in 2027 for their deferred capital gains. However, a cost segregation study can help reduce this future liability.

Is this a strategy that you’ve considered?