The Best and Worst Properties for Cost Segregation!

[Julio Gonzalez]

All properties are eligible for a cost segregation study as long as they are investment properties. This means that your permanent residence is excluded. While no property is too big or too small for a cost segregation study, it’s important to speak with your accountant to ensure the benefits outweigh the cost of the study.

A common misconception is that real estate properties under $1M have a smaller tax basis and therefore do not benefit from a cost segregation study due to the associated fees. However, properties ranging from $500k and under to $50M or more have benefited from cost segregation. This is due to bonus depreciation which allows taxpayers to deduct 100% of qualifying property costs in the first year, in addition to regular depreciation for new construction and improvement. The study could also identify the opportunity to capture additional benefits such as dispositions, and repair and maintenance expenditures. This would increase the benefit to where the fee would not be so outrageous that it would hinder the investment. However, with smaller investments, if bonus depreciation isn’t captured in the first year, a cost segregation study’s cost may outweigh the added benefit.

Additionally small tenant improvements could have similar benefits with bonus depreciation and new assets. Again, this is a conversation to have with your accountant to ensure the benefits would outweigh the costs.

Another misconception is that there is little value in a cost seg study for properties that do not have a lot of personal property in them or very little interior build out, such as industrial warehouses. However, these properties generally have a lot of land improvements that qualify as well as certain portions of electrical, mechanical and plumbing that can qualify. This allows for proper retirement of assets.

If a property has already been sold it may still be a good candidate for cost segregation as long as you sold the building and have not filed the tax return. This would allow you to maximize tax deductions at ordinary tax rates. Although the study may increase the gain, the gain may be taxed at a much lower rate making it a beneficial investment.

If a property is purchased with the intention to flip or own for a short period of time (less than 3 years), a cost segregation study may not be significant.

Overall, as long as you intend to hold the investment property for greater than a year, the benefits of a cost segregation study should be considered. You can determine if the cost segregation study makes sense by speaking with your accountant and many cost segregation professionals offer a free analysis.

What are your thoughts on cost segregation?