Cost Segregation is the practice of identifying assets and their costs, and classifying those assets for federal tax purposes. In a real estate cost segregation study, certain commercial building costs previously classified with a 39-year depreciable life, can instead be classified as personal property or land improvements, with a 5, 7, or 15-year rate of depreciation using accelerated methods. Residential buildings, including multi-family buildings are subject to a 27.5-year life. An “engineering-based” study allows a building owner to depreciate a new or existing structure in the shortest amount of time permissible under current tax laws.
The Benefits of a Cost Segregation Study Include:
- An immediate increase in cash flow
- A reduction in current tax liability
- The deferral of taxes
- The ability to reclaim “missed” depreciation deductions from prior years (without having to amend tax returns)
WHAT ROLE DOES “TIME VALUE OF MONEY” (TVM) PLAY?
Cost segregation is based on the fundamental principle that “a dollar today is worth more than a dollar tomorrow”. The same logic applies to the statement: “a tax deduction today is worth more than a tax deduction tomorrow”. By accelerating a buildings’ depreciation, property owners can lower their tax liability and thus realize a significant increase in cash flow. This larger cash flow—resulting from postponing tax payments—is available for other investments.
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Does Your Investment Utilize A Commercial Real Estate Cost Segregation Study?
“The major advantage of cost segregation is not necessarily that it will produce more depreciation deductions. Instead, due to the time value of money, the advantage of these front-loaded deductions will be quantifiably greater than had the deductions been spread over longer periods of time using slower depreciation methods.” -Journal of Accountancy © 2005 by the AICPA
The Bottom Line
Cost Segregation studies are one of the most valuable tax strategies available to owners of commercial real estate today. This increasingly popular tax strategy offers facility owners the opportunity to defer taxes, reduce their overall current tax burden, and free up capital by improving their current cash flow. Virtually every taxpayer who owns, constructs, renovates, or acquires a commercial real estate structure stands to benefit from a cost segregation analysis. By engaging the expertise of a qualified CPA firm like Ernst & Morris, property owners can be assured that their study will stand up to the strictest scrutiny of IRS auditors.
This article is compliments of Ernst & Morris an expert in Cost Segregation studies and is a strategy that Presario Ventures utilizes on almost all of its properties.