Cost segregation analysis?

[Tim W.]

Recently, I purchased two multifamily apartment buildings. They are value add opportunities and require rehab/renovations. The idea of cost segregation came up regarding accelerating the depreciation costs. At what point would one consider performing a cost seg? Any help/advice would appreciated. Thanks, Tim

[Mike Dymski]

Originally posted by @Bart H.:

Newbie question.  What is cost segregation?  and how is it beneficial from a tax perspective?   I assume from the name you are allocating costs to separate parts of a property.  Thanks in advance for any responses.

 You are correct...cost segregation separates the "personal property" and "land improvements" from the "real property" and depreciates them over shorter lives (5, 7, and 15 years rather than 27.5 years for residential or 39 years for commercial).  In addition, the shorter lives use accelerated depreciation methods versus straight line depreciation (which is used for real property)...and certain "personal property" can qualify for "bonus depreciation", which allows a depreciation deduction on 50% of the purchase price in year 1, plus you get the regular depreciation on the remainder after the 50% is taken.  Cost segregation + accelerated depreciation methods + bonus depreciation are huge benefits that drive the after tax return on investment way up.  Leverage and taxes are two of the greatest benefits of real estate (especially larger properties) over other asset classes and two of the least understood benefits (once you get past the basics).  Hope this helps.