No doubt about it, a cost segregation study is a powerful tool that helps you increase your cash flow and decrease your tax liability! Real Estate investors can now save Dollars with a cost segregation study. Yes, you heard it right. Many business owners are unaware that this tax strategy can improve return on investments by reducing the depreciation lives of a few real estate investments by 5,7 or 15 years. If you have never come across the term cost segregation, then this might be a little confusing, but don’t worry. Glide through this article and you will get an overall picture of what cost segregation is and the answer to the question in the title. Let’s start off with what is cost segregation all about.
What is cost segregation?
Cost segregation separates short term and long-term real estate components. This is done in order to increase depreciation which in turn will result in decreased state and federal income taxes. Let’s make it simple with an example. Say you own a commercial building, the main building is depreciated over 30 or 40 years but short-term assets like carpets, signages, pavements are all depreciated over 5,7 or a 15-year time period. This helps a taxpayer pay less tax during the early stages of a property’s life.
Let’s understand the concept with a simple example.
Say you have bought a commercial property; you have not just bought the building but its components as well. You might look at this as a whole property but 20 to 40 percent of the building components are looked at by the IRS in a different manner.
The building structure is usually depreciated over 39 years but short life components in the building can be depreciated over 5,7 or 15 years. Yes, a cost segregation study allocates each component in your property in the appropriate asset class to calculate depreciation deductions.
Is CSS right for you?
There are three major aspects you must consider i.e. in case of the below mentioned three aspects a cost segregation study does not make sense.
- If the holding period is less than one year, then cost segregation will not prove useful
- If you already have massive net loss and
- If you are a limited partner who has no passive income, then you cannot use the additional depreciation.
Buildings will depreciate anyway, isn’t this just a matter of time?
This question would have popped in your mind by now. Yes, you are right, your building will anyway depreciate but when cost segregation comes into play it increases cash flow in a short period of time. Cost segregation is said to provide long term benefits because of the value of money.
When can a cost segregation study be performed?
Many businesses have this misconception that a cost segregation study can be done only when filing for the tax year the investment was made. It is not so, if you own a business and if you have made large investments in recent years but failed to segregate the costs you can always go back and get the deductions.
Can CSS increase ROI?
You should have got an answer by now, yes, a cost segregation study can reduce your tax liability and increase your ROI. CSS proves beneficial over a long time. But for analysis, you must engage with qualified professionals who have expertise in the field. They will help you figure out if the benefits of a CSS study can outweigh the cost.