Accelerated Depreciation
Cost segregation allows property owners to reclassify certain building components and personal property assets into shorter depreciation periods (5, 7, or 15 years) instead of the standard 27.5-year (residential) or 39-year (commercial) schedule. This leads to:
Larger Early Deductions: Substantial depreciation deductions in the early years of property ownership.
Enhanced Cash Flow: Increased deductions reduce taxable income, resulting in lower tax payments and improved cash flow.
Tax Deferral
By front-loading depreciation deductions, cost segregation effectively defers tax liabilities. This deferral allows property owners to use the tax savings for other investments or operational needs, creating opportunities for growth and expansion.
Increased Return on Investment (ROI)
The improved cash flow from accelerated depreciation can be reinvested into the property or other ventures, potentially increasing the property's overall return on investment. The additional funds can be used for property upgrades, expansions, or new acquisitions.
Immediate Tax Savings
Cost segregation provides immediate tax savings by reducing the amount of taxable income. These savings can be particularly beneficial in the initial years of property ownership when cash flow needs are often the highest.
Improved Asset Management
Conducting a cost segregation study involves a thorough review of a property’s components. This detailed analysis can enhance asset management by providing better insight into the property’s assets and their useful lives.
Maximizing Tax Benefits with Bonus Depreciation
Recent tax reforms, such as the Tax Cuts and Jobs Act of 2017, allow for 100% bonus depreciation on qualifying property. This means that certain assets identified in a cost segregation study can be fully depreciated in the year they are placed in service, further increasing tax savings.
Enhanced Property Value
The tax savings generated from cost segregation can be reinvested into property improvements, thereby enhancing the property’s value. Upgraded properties can attract higher rents and better-quality tenants, contributing to increased income and property value.
Flexibility for Future Tax Planning
Cost segregation offers flexibility for future tax planning. If a property is sold, the depreciation benefits can be recaptured at potentially lower tax rates, depending on the investor's overall tax strategy and other income.
Support for Tax Audit Defense
A professional cost segregation study provides detailed documentation and analysis that can be valuable in the event of an IRS audit. The thorough and systematic approach of a certified study helps ensure compliance with tax regulations and provides a strong defense against potential audits.
Application to Various Property Types
Cost segregation can be applied to various types of real estate, including commercial buildings, residential rental properties, manufacturing facilities, and even renovations and improvements. This broad applicability makes it a versatile tool for many real estate investors and business owners.