Do you own a real estate property, and have you always been wondering if cost segregation can help you reduce your federal income taxes? No matter you have not conducted a cost segregation study until today, but every commercial real estate investor should definitely have cost segregation in their back pocket.
Cost segregation plays a major role in reducing your tax liability, increasing cash flow and a CSS can also uncover the missed deductions.
Cost Segregation – A strategy to think off
The tax reform has made cost segregation a valuable one by making simple changes to bonus depreciation. Thinking what bonus depreciation is? Let me explain it to you. If you are an individual property owner or a business, you can immediately deduct a percent of the asset’s cost in the very first year the asset was put into service. In 2019 only new properties where qualifying for bonus depreciation and the percent was only fifty. But the best part after the tax reform is that used property is now eligible for bonus depreciation. The bonus percent has also been increased to a hundred through the 2022 tax year. Hence, performing a cost segregation study has a very strong impact and assets that fall under the personal property category instead of real property are now good candidates for bonus depreciation and the best part is, it can be expensed in year one.
Let’s understand the concept with a simple example
Let us assume you have purchased a property for $20 million and you perform a cost segregation study for the same. A cost segregation study reclassifies twenty percent of the cost as personal property. By applying bonus depreciation say, you write off $2 million of the purchase price in the very first year. If you have a 25-percentage marginal tax rate, then you will be saving $500,000 in taxes in the first year.
Can renovated properties also benefit from CSS?
Late in 2015, even before the Tax Cuts and Jobs Act was passed there was a different tax law called the PATH Act. After this law was passed plumbing, alarm systems came below the category of 15-year assets. But after two years when the TCJA was passed, Congress wanted to extend bonus depreciation to qualified improved properties but sadly it was hit bad and did not qualify for bonus depreciation.
But renovators can still benefit from a CSS. A cost segregation study identifies assets that do not come under the qualified improved properties and makes sure the assets depreciate on a 3,5- or 7-year period.
Better late than never
Every taxpayer can see good results from a cost segregation study. But the most important aspect is finding the right professional with expertise in the field. Do some homework, research ask the firm a few questions. Make sure the cost segregation specialist you opt meets the IRS guidelines and know tax codes in and out. The best thing you can do is ask the firm a lot of questions and get your money back.