Cost Segregation: What Real Estate Investors Should Know

Are you an investor in real estate who owns multiple properties, and are you worried about tax time? This could be the time for you to make use of cost segregation and put this anxiety out of the way.

Cost segregation is a way to make real estate investors save many millions of dollars of tax each year. This tax-saving technique makes use of the property's depreciation value as a loss in order to reduce the amount you pay in taxes at the close of the calendar year. It is particularly useful for those who own newly constructed property that is worth more than $1 million.

Making use of cost segregation for your benefit can be accomplished with the assistance of an experienced tax professional, a cost segregation analysis group, and this helpful guide. Let's get started.

What Is Cost Segregation?

Cost segregation studies send experienced engineers to your property to classify depreciating components of your building. They can range from flooring to appliances for your home. The aim of the research is to determine property-related expenses.

Typically, commercial properties depreciate over 39 years, whereas residential properties depreciate for 27.5 years. Personal property and improvements to land are depreciated over 5, 7, or 15 years. The land itself doesn't decrease in value.

It is important to remember the fact that segregation of costs refers to an opportunity to reclassify property assets. Certain of these assets can be classified into 5, 7, or 15-year-old depreciation values, and others will remain at 39 as well as 27.5-year mark.

The cost segregation team evaluates your properties to determine the best tax codes for different depreciating areas of your property. After calculating the depreciation of the entire property, they divide the total depreciation by an annual amount. The annual depreciation expenses then transform into a filed loss on taxes and reduce the total amount that you have to pay taxes on.

How Cost Segregation Can Help

A lot of people wonder why they would cut their home into such small pieces instead of depreciating the whole structure over time. Since the former is much more straightforward to do, isn't it?

Yes, it's true; however, it's not the most advantageous for the owner of the property.

Let's say you purchase an office building valued at $2 million. As it's commercial, it will depreciate over a period of 39 years. If you're within the tax bracket of 30%, you can save $7,700 a year by simply calculating the depreciation on your property.

Let's say you choose to take a calculated gamble of investing in an expense segregation study. The skilled engineers and our tax experts can determine that the majority of an investment in your property could be considered assets that will depreciate over a 5-year period. This is quite a leap from the 39-year period that you had initially been working with.

In this scenario, 50 percent of assets equal $500,000, so the equivalent of half million is placed on a five-year depreciation plan at a similar tax bracket of 30 percent. In a flash, you can save up to 30k per year for the first 5 years you own the property.

Ypu can welcome your more than $22,000 of savings annually when compared to the depreciation method that you apply.