Are you using cost segregation as a planning tool in your real estate portfolio?

[Julio Gonzalez]

Many investors are familiar with the concept of cost segregation studies and may have even had studies performed on their properties. But are you using it to its full capability as a planning tool within your real estate portfolio? Cost segregation is not just a short-term relief from taxes, it can be a powerful tool used to optimize your portfolio.

WHAT IS A COST SEGREGATION STUDY?

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. Here’s an example of bonus depreciation.

HOW CAN I USE THIS AS A PLANNING TOOL?

1. Immediate Cash Flow: As mentioned above, cost segregation accelerates the depreciation of your property in initial years following the study which increases the amount of available cash for the investor. This cash can be used for immediate needs or future growth of your portfolio.
2. Reinvesting Strategically: The available cash can now be used strategically whether that be upgrading one of your existing properties or purchasing a new property. This can help allocate your resources to align with your long-term strategic plan.
3. Better Budgeting and Management of Finances: Now that you have more cash flow upfront, your cash flow is more predictable. These funds can be used to budget for routine maintenance, debt reduction or property renovations. With a better understanding of your budget, you can make more informed decisions to ensure you are putting the money towards things that will not only keep your properties running, but to also increase the value of your properties.
4. Financial Plans for the Future: Having a cost segregation study performed and using it as a planning tool allows you to have a roadmap for the future including being able to strategically utilize other tax benefits alongside it. Being a forward-thinking investor allows your portfolio to be more resilient in times of economic downturns or market fluctuations.
5. Competitive Edge: The immediate cash flow available from a cost segregation study could give you an advantage against competitors as you may have more liquidity available to purchase a new property than those who aren’t utilizing cost segregation. In this competitive real estate market, having liquidity can be a huge advantage and a game-changer for your portfolio as you are able to act more swiftly when an investment opportunity arises.

Have you utilized a cost segregation study as a planning tool? If so, in what ways?