Many multifamily investors are not aware of the tax benefits. As you know real estate is all about physical assets like buildings, their conditions degrade as time passes by. Cost segregation allows multifamily investors to depreciate the value of the property every year and is considered one of the major tax benefits. Let’s get to know more about cost segregation in this article.
Understanding cost segregation
Cost segregation is a strategy that increases the amount of depreciation every year. To understand the concept better let’s start by discussing how depreciation expenses are calculated. Multifamilies can be usually depreciated over a 27.5 years under the straight-line method, however, with cost segregation every aspect of the property is reviewed and segregated. This helps in identifying for which components, depreciation can be accelerated.
Now let’s discuss the different categories in cost segregation. A cost segregation study categorizes the components of a property into four different categories and each component is depreciated over different time periods based on the assets life. Land, building, land improvements, and personal property are different categories. Each category has subcategories, identifying and classifying the components might seem difficult and this is where a cost segregation firm comes into play.
Identifying the right cost segregation company
The IRS requires cost segregation studies to be carried out by specialists. The studies should be IRS tested and CPA approved. Hence finding a firm that specializes in performing CSS is very important. O’Connor’s cost segregation service is IRS compliant, CPA approved and warrantied for the duration of your ownership of the asset studied. The cost segregation studies not only detail all short-life components but also provide a breakout of all Units of Property (UoP) as required in the recent IRS Tangible Property Regulations.
The bottom line
Cost segregation is extremely effective, it reduces income taxes by increasing depreciation in the first year of ownership. Initiating a CSS might seem difficult but it results in significant tax savings. Don’t wait anymore, get a cost segregation study done for your property today.