Commercial real estate owners who want to maximize their tax savings can make use of the cost segregation strategy. It is considered to be the best and is now one of the most popular IRS approved strategies with some changes under the CARES Act.
As we all know cost segregation is an IRS approved engineered based strategy. A cost segregation study identifies specific property components and reclassifies them according to their asset class. This helps in accelerating depreciation. Personal properties depreciate over a period of five or seven years and land improvements over a period of 15 years when compared to the old 27.5 or 39 year period. Cost segregation studies also provide data that support other tax strategies like the TPR analysis, EPAct 179D, and Section 179 Expensing.
Cost segregation made even better with bonus depreciation
The Tax Cuts and Jobs Act has made cost segregation even better with bonus depreciation. Now, cost segregation studies not only help real estate owners to accelerate depreciation but increase the speed of the deductions as well with the help of bonus depreciation.
Scenarios where cost segregation prove to be useful
In order to increase the savings from the first year, it is important to carry out the cost segregation study as soon as the new property is placed into service. Let us take a hotel with 400 guest rooms for example with larger suites, multiple restaurants, and banquet halls. The depreciable basis of the property being $92,698,000. Soon after the construction was completed 27.4% of the assets were moved into the five-year personal property and the first-year tax savings were quite pleasing being around $8,647,253.
Considering acquired properties for bonus depreciation is like a blessing for taxpayers. Now, in this scenario when a buyer acquires a property, cost segregation is something that comes along.
In the earlier case, we were discussing about cost segregation being performed for properties newly constructed or newly acquired. If your property does not fall under the above two scenarios then a look back study helps you get all the depreciation you would have got if you had performed a cost segregation study in the first year you had acquired the property. Look back studies are mostly carried out after renovations and you can write off the remaining depreciation immediately. This process is usually called PAD and cost segregation helps in documenting the process.
Cost segregation studies have always proved useful and now it has become even more significant. Many taxpayers today are looking for a strategy that can bring in more value from the earlier projects. Cost segregation can be considered one such strategy where cash flow can be restored. Discuss with your tax reduction expert today.