Do you know if you are realizing all of the available benefits from your real estate holdings? If you haven’t considered a cost segregation study on the buildings you own, chances are you are leaving real value on the table.
Cost segregation is an IRS approved method of reclassifying components and improvements to a commercial building or a residential rental building. It can greatly reduce your taxable income and increase your cash flow.
A cost segregation study entails a review of your building by a qualified engineer to identify components of the building that can be depreciated faster than the building itself. Certain components can be classified as personal property (5-year or 7-year life) or land improvements (15-year life), instead of real property that must be depreciated over 27.5 years (residential) or 39 years (commercial).
The real value of cost segregation study is in the present value savings achieved through the accelerated depreciation.
The study can even be done in a year subsequent to the construction or purchase of a building; the taxpayer can catch up on the depreciation expense on the tax return for the year in which the study is conducted. This can result in a huge deduction in the year of the study as well as benefits moving forward.
Let’s say the total cost of a commercial building was $975,000. Without a cost segregation study, the annual depreciation expense would be $25,000 ($975,000 depreciated over 39 years). However, a study might reveal that $195,000 of the building's total cost is land improvements, which can be depreciated over 15 years. The result would be an increase in the annual deduction for the first 15 years to $33,000 from $25,000.
Now, let’s say that study was done in the sixth year of owning the building instead of the first year. In the year of the study, the taxpayer could take a total current depreciation deduction of $73,000 ($33,000 annual depreciation + $40,000 catch-up depreciation). The $40,000 catch-up in depreciation is calculated by comparing the depreciation to date using the study ($165,000) to that not using the study ($125,000).
Based on you particular circumstances, 25% or more of the cost of your building may be able to be reclassified. This may result in hundreds of thousands of dollars in present value savings.
Looking for more information about our cost segregation services? Our CPA firm proudly serves, Auburn, Opelika, Montgomery and the rest of Alabama and surrounding states. Fill out our contact form below or call us anytime at 334-887-7022 and one of our professionals will be glad to help. Together, we can Return Value to your organization.
