What is Cost Segregation?
Cost segregation is a tax strategy that can help commercial property owners and landlords increase their cash flow by accelerating depreciation deductions. By identifying and properly classifying certain assets within a property, a cost segregation study can help property owners reallocate some of the costs of those assets from the general property class (39-year depreciation) to shorter-lived classes (5, 7, and 15-year depreciation).
The Key Benefits of Cost Segregation
One of the key benefits of cost segregation is that it can significantly increase the amount of depreciation deductions taken in the early years of a property’s life. This can lead to significant tax savings for property owners, as well as an improved cash flow.
Cost Segregation Study
To conduct a cost segregation study, a property owner will typically hire a specialized engineer or cost segregation expert to physically inspect the property and identify assets that can be reclassified. These assets may include items such as lighting fixtures, HVAC systems, electrical and plumbing systems, and other items that are not typically considered real property.
It’s important to note that cost segregation studies can be complex and time-consuming, and they can also be quite expensive. However, the potential tax savings and improved cash flow can make it well worth the investment for many commercial property owners and landlords.
Additionally, it’s also important to note that the IRS has specific guidelines for cost segregation studies. The IRS requires that cost segregation studies be performed by a qualified engineer or other expert and that the studies are based on sound engineering or architectural principles.
In conclusion, cost segregation is a valuable strategy for commercial property owners and landlords looking to increase their cash flow and reduce their taxes. By identifying and reclassifying certain assets within a property, a cost segregation study can help property owners take advantage of accelerated depreciation deductions. However, it’s important to work with a qualified expert and follow IRS guidelines when conducting a cost segregation study.