Can cost segregation help property owners increase cash flow?

During this chaotic time, cash is king. Real estate owners and property owners who have made improvements to their properties can benefit and obtain tax relief from the COVID-19 initiatives. Cost segregation benefits multiple industry types which include apartments, hotels, office buildings, shopping centers, retail, drug stores, private schools, medical buildings, nursing homes, funeral homes, manufacturing units, warehouse, storage, restaurants, fast food facilities, auto dealership, banks, REIT’s and green buildings.

Cost segregation is a specialized and powerful tool that analyses capital costs and allocates costs between different depreciable lives. This includes 5, 7, 15, 27½, and 39-year items.  Cost segregation accurately allocates property components for federal income tax depreciation calculations. Property owners frequently increase depreciation by 50-75%, thus lowering taxable income.

Cost Segregation: A tax relief opportunity for real estate owners

A cost segregation study segregates real estate costs into different asset classifications and recovery periods for federal and state income tax purposes. This in turn results in the property having a shorter tax life which can be five, seven, or 15 years when compared to the standard 27.5 or 39 year depreciation period, which in turn helps property owners increase deductions and reduce their tax liability.

Here is what IRS says about cost segregation

IRS, the Internal Revenue Service which is a U.S federal agency that is responsible for collecting taxes and enforcing tax laws say “to calculate depreciation for Federal income tax purposes, taxpayers must use the correct method and proper recovery period for each asset…”. And the best way to determine the proper recovery period for an asset is to use a cost segregation study.

Cost segregation has always been an attractive method among real estate investors and after the 2017 TCJA allowed 5, 7, and 15-year life property to be depreciated in one year the benefits of cost segregation magnified. Cost segregation proves to be better for assets acquired from September 28, 2017, to December 31, 2022. During this period, the short life assets can be depreciated in the first year of ownership. There are chances where the tax savings may cover 33 percent to 66 percent of the down payment used to purchase the asset.

Do not fret about benefiting from massive income tax savings using cost segregation

There are a lot of misconceptions when it comes to cost segregation. The IRS audit technique guide shows experience and expertise matter when it comes to performing a cost segregation study. Not only does experience and expertise matter but the methodology used should also be taken into consideration shows the IRS audit technique guide.

As COVID-19 is causing a lot of economic shifts, the knowledge of cost segregation is spreading among taxpayers. Taxpayers need to make sure professionals with experience and expertise carry out the work. It is always better for CPA firms to have a look at the results provided. It is better if the work is reviewed.

The bottom line

Apart from the benefits of reduced taxes and improved cash flow, a quality cost segregation carried out keeps you compliant with the IRS regulations. Make sure your cost segregation specialist provides a quality study and meets all the IRS guidelines. It is better if the short-term depreciable assets are mentioned in detail.

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