What can Cost Segregation do for me?
Posted by CSR on August 06, 2015
Cost segregation is a powerful tax planning method that uncovers huge savings for owners of commercial real estate.
The New York Times
“By ignoring generous IRS guidelines when establishing depreciation schedules, 90% of real estate investors are unintentionally overpaying taxes.”
The Benefits of Cost Segregation
Engineering based cost segregation studies allow commercial real estate owners to take
assets that are considered to be real property assets and reclassify them as personal property assets.
Real property assets are depreciable over a 39 year period, where personal property assets are depreciable over 5 and 7 years. This reclassification accelerates your depreciation period, which decreases current and past tax obligations, thus increases your cash flow.
What this could mean for you
The IRS allows you to make a simple change to your method of depreciation to account for a cost segregation study.
The government also allows taxpayers to catch up on all previous years for items reclassified into shorter depreciation lives as a result of a cost segregation study.
The engineered cost segregation study means more cash flow for you and your business.
On a building purchased or built for $2,500,000 the owner can dramatically reduce their current tax liability.
Before CS After CS
Straight Depreciation Accelerated Depreciation
Year 1 $64,000 $280,000
Year 2 $64,000 $226,000
Year 3 $64,000 $156,000
Year 4 $64,000 $127,000
Year 5 $64,000 $108,000
Year 6 $64,000 $87,000
Year 7 $64,000 $79,000
7 Years Total $448,000 $1,063,000
The Engineered Cost Segregation Study increased the depreciation by over $615,000
through 7 years, resulting in a tax reduction of over $215,000, leaving the property owner the additional $215,000 to use as they desire.
The Journal of Accountancy States that:
“Each $100,000 in assets reclassified from a 39-year recovery period to a 5 year recovery period results in approximately $22,000 in net present value savings,
assuming an 8% discount rate and a 40% marginal tax rate.”
IRS Cost Segregation Audit
Chapter 5: Review and Examination
of a Cost Segregation Study