Cost segregation is a federal income tax tool which is commonly used by companies as well as individuals who go for construction, purchase, expansion, or renovation of real estate properties. The purpose of this strategic tax planning tool is to improve the short-term cash flow by optimizing depreciation deductions and deferring federal as well as state income tax liabilities. A property when purchased not only includes the structure but also the interior and exterior elements, 20%-40% of which are taxable. These taxable elements can be written off much before the building itself. Such properties are usually depreciated over a period of 27 ½ to 39 years.
The goal of cost segregation consultants is to identify and reclassify such properties, so that those are eligible for depreciation over a period of 5, 7, and 15 years at accelerated rates. A cost is assigned to properties which are reallocated by engineering estimating methods and then the appropriate depreciable life is determined. Cost segregation helps business owners to increase the depreciation expense and subsequently decrease the amount of tax payable resulting in substantial cash flow.
Cost Segregation Benefits
In addition to the immediate tax savings and increased cash-flow benefits, it provides to commercial real estate owners, cost segregation analysis has other benefits which include estate planning advantages and insurance cost savings.
In the estate planning process, cost segregation study provides the scope to accelerate the depreciation twice on the same property. It is done once at its original cost and for the second time at its stepped-up value. When the cost segregation report is provided to the insurance company, they can focus on its risk and underwrite the cost of insurance. Furthermore, cost segregation study conducted by cost segregation consultants can quantify a property’s major elements and leasehold improvements, so that they can be deducted when replaced. One can keep an IRS review on hold, as cost segregation also provides an independent third-party analysis.
The renowned cost segregation consultants have experience of serving businesses for more than two decades and follow the IRS audit techniques guide. They employ architectural engineering knowledge along with tax law experience to identify the elements that are eligible for accelerated depreciation rates. The professionals are a blend of engineering and tax code expertise and carry out a site inspection for all cost segregation studies. Their main focus is to acquaint CPA firms and other tax professionals with their services and offer clients a single source of engineered problem-solving