Unmasking the myths of cost segregation. Is cost segregation worth your effort?

Commercial property owners, here is an eye opener for you. Reduce your federal income taxes with a cost segregation study. Have you recently purchased a building or spent dollars on appliances or furnitures? Cost Segregation helps you shorten the useful life of assets using the accelerated depreciation method which in turn reduces your tax liability resulting in an increased cash flow. It is truly a hidden gem for taxpayers, continue reading this article and you will know why.

Cost Segregation – Tax strategy used by commercial property owners

Cost segregation helps you identify personal property assets, say a building’s non-structural elements, indirect construction costs or exterior land improvements and lessens the depreciation time for taxation purposes which in turn reduces tax obligations. It is a proven IRS defined method for depreciating commercial properties and is also considered the most accurate method for any asset acquired or constructed after 1986. Cost segregation helps in increasing the cash flow, reduces the current tax liability, deferral of federal income taxes and has the ability to recapture past years.

Does your property qualify for cost segregation? 

There must be this big question popping in your mind right now, many have the false idea that cost segregation can be conducted only on newly constructed buildings, but this is not the case.  A cost segregation study can be conducted on any real property  

  •  acquired, built or significantly remodeled after 1986
  • commercial for profit venture
  • depreciable basis of at least $500,000

How does it work?

Let’s imagine that you own a commercial building for the past forty years and you have been getting 1/40th of the building’s value as a tax deduction every year. This might prove useful for you during the tax time but there is another smart way to do it and this is where cost segregation comes into play.

Many aspects in a building like carpenting, plumbing fixtures, lighting, etc. do not last for long and these components can be segregated from the building for tax purposes. Yes, you heard it right. A cost segregation study can help you reduce your tax liability by detailing all the available short-term depreciable assets.

Common myths about cost segregation

  • Cost Segregation doesn’t work for short term assets

When you purchase a property, the property does not have enough organic equity, only when you add value to it the market value will increase. When your asset is segregated using the cost segregation approach you get to know the exact values for the different class lives. This helps you in calculating PAD, which is otherwise called Partial Asset Disposition. If PAD is not taken into consideration then double depreciation of the assets gets accumulated which in turn hurts, when you calculate recapture after sale of the asset, which means PAD helps you avoid recapture tax.

  • What does time have to do with cost segregation?

Let’s make this simple, say you won a lottery worth $50,000 and you have two options, the first one is where you take the whole amount $50,000 and the second one is where you choose to take $1,000 every year for 50 years. Which one would you opt for? Most probably, you would be going for option 1 with the idea to invest it and make more money out of it. If you go for the second option, you would spend $1,000 for your daily expense and have nothing at the end of 50 years. Cost segregation works the similar way, it helps you shift depreciation from a 40 year asset to 3,5,7 or 15 years and helps you use this depreciation to offset your taxable income and reinvest the amount saved again on your property.

  • Size of the property and cost segregation

Does the size of a property really matter for cost segregation? Not at all, properties worth $300,000 or less can also pursue cost segregation.  Property owners who have owned the property for ten years or more are usually the winners in cost segregation. 

Is cost segregation worth your effort?

Yes, as mentioned above it is truly a gem for property owners. It is the best tax strategy where accelerating depreciation results in lowering your tax due. It helps in increasing the cash flow and decreasing the current tax liability.


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