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Cost Segregation Services
What is Cost Segregation?
Cost segregation is a tax strategy that helps property owners save money by accelerating depreciation deductions, which enhances cash flow and defers taxes.
How Does Cost Segregation Works?
When you buy a building, it depreciates over time due to wear and tear. Normally, this depreciation is spread out over 27.5 years for residential properties and 39 years for commercial properties. However, a building isn't just one solid object; it's made up of many different components, like lighting, HVAC systems, and plumbing.
Each of these components has a different lifespan. For example, while the building itself may depreciate over decades, parts like lighting fixtures or HVAC systems depreciate much faster—typically over 5, 7, or 15 years. Cost segregation identifies these individual components and allows you to depreciate them over their shorter lifespans.
Potential Savings With a cost segregation analysis, you might be able to write off up to 30-35% of your building's original purchase price in the first year alone. This means you can deduct more from your taxes sooner, keeping more money in your pocket during the early years of owning the property.
Example: Imagine you bought a commercial building for $1 million. Without cost segregation, you would depreciate the building over 39 years, resulting in an annual depreciation deduction of about $25,641. With cost segregation, you can identify components worth $300,000 that can be depreciated over 5, 7, or 15 years instead. This could mean deductions of around $60,000 in the first year, significantly increasing your cash flow.
Boosting Cash Flow By accelerating depreciation, cost segregation allows you to claim larger deductions sooner, which reduces your taxable income and increases your cash flow. This extra cash can be reinvested into your business, used to pay down debt, or saved for future expenses.
Who Should Consider Cost Segregation? Cost segregation can be beneficial for both residential and commercial property owners. If you’ve recently purchased, renovated, or built a property, or if you’ve never had a cost segregation study done on your existing property, you might qualify for significant tax savings.
Getting Started To start a cost segregation study, you’ll need to work with professionals who can analyze your property and identify the different components that qualify for accelerated depreciation. This typically involves engineers and tax experts who understand both the construction and tax aspects of your property.
In summary, cost segregation is a powerful tool that can lead to substantial tax savings by allowing property owners to depreciate individual components of their buildings over shorter periods. This strategy not only defers taxes but also significantly enhances cash flow in the early years of property ownership.
How Much Money Could You Save?
Immediate Deductions Cost segregation can lead to substantial tax savings by allowing you to write off a significant portion of your building's purchase price quickly. For instance, if you buy a property for $1 million, a cost segregation study could enable you to deduct $300,000 to $400,000 right away. If you financed the purchase with $100,000 of your own money and a $900,000 loan, you effectively spent $100,000 but received a $300,000 deduction, providing a substantial immediate tax benefit.
Example Scenario Consider a scenario where you are classified as a real estate professional or have material participation in a commercial real estate investment, and you earn a $100,000 salary. With a $300,000 deduction from cost segregation, you can apply this deduction to offset your taxable income. This means you only pay taxes on $700,000 instead of $1 million, significantly reducing your tax liability.
Maximizing Cash Flow By reclassifying and depreciating your property's components, cost segregation can enhance your cash flow and accelerate your return on investment. This strategy helps you recover your capital investment more quickly, making your property more profitable in the early years of ownership.
Professional Expertise and Reporting At Engineered Tax Services, we specialize in uncovering potential tax savings through detailed cost segregation studies. Our team provides comprehensive engineering reports and collaborates seamlessly with the IRS and your CPA to ensure minimal disruption to your business operations. With over 30,000 cost segregation studies completed in the past 20 years, we have saved our clients millions of dollars in taxes.
Choosing the Right Partner Working with an experienced and knowledgeable accounting firm can maximize the benefits of cost segregation. Our national expertise in this field ensures that you receive the best possible tax benefits, increasing your savings and improving your financial position.
In summary, a cost segregation study can lead to immediate and significant tax deductions, improve cash flow, and accelerate the return on your property investment. Partnering with a professional firm like Engineered Tax Services ensures you maximize these benefits and achieve substantial tax savings.
Do I Qualify For A
Cost Segregation Study?
The short answer would be, yes!
If you’re a corporation, partnership, trust, or individual with real estate purchased or built within the past 15 years with tax liabilities you can benefit from a cost segregation study.
Because a cost seg study dissects the construction cost or purchase price of the property that would otherwise be depreciated over 27.5 or 39 years, both residential and non-residential commercial properties both qualify.
Demystifying Depreciation: A Visual Guide to Tax Savings
Understanding the concept of depreciation can be a game-changer for property owners when it comes to tax savings. This infographic breaks down the essentials of depreciation, from its definition in accounting to the various methods used to calculate it. By visually outlining how depreciation impacts taxable income, the infographic provides a clear and concise explanation of this important financial concept. It also compares scenarios with and without depreciation, highlighting the potential tax benefits. Whether you're new to property ownership or looking to optimize your tax strategy, this visual guide simplifies the complexities of depreciation and its role in taxation.
How much Depreciation can be Accelerated for my Property Type?
Cost segregation allows for varying degrees of accelerated depreciation depending on the type of property. Each property type—whether residential, commercial, industrial, or special-purpose—has unique characteristics that influence the potential for depreciation acceleration. Below is a table showing the potential percentages of accelerated depreciation for different property types.
Understanding the Table
- Residential Properties: Apartment buildings and assisted living facilities typically see 20-45% accelerated depreciation.
- Commercial Properties: Banks, grocery stores, and hospitals often achieve 20-45% accelerated depreciation.
- Industrial Properties: Manufacturing facilities and warehouses have a range of 18-40% accelerated depreciation.
- Special-Purpose Properties: Car washes and gas stations can achieve up to 100% accelerated depreciation, significantly boosting early-year cash flow.
By leveraging cost segregation, you can maximize your tax savings and enhance cash flow based on your property type. This table helps you understand the potential for accelerated depreciation specific to your investment.
Engineered Documentation Approaches
Cost segregation specialists use various methods to compile a comprehensive report for a cost segregation study. While the IRS does not have a standard procedure for these studies, a detailed and accurate report can expedite the review process and ensure the taxpayer receives their deductions promptly.
The IRS guide on cost segregation outlines several methodologies commonly used by specialists, including the detailed cost approach, the detailed cost estimate approach, the survey approach, the residual estimation approach, and the sampling approach.
The detailed cost approach relies on actual construction and accounting records to compile a report. This method is highly accurate since it uses real documentation rather than estimates, but it is also the most time-consuming.
Typically used for new construction, the detailed cost estimate approach also requires a comprehensive list of documents. When records are unavailable, specialists estimate the cost of components using reliable sources, which must be referenced in the study. Providing all requested invoices can minimize reliance on estimates.
In the survey approach, specialists conduct a site inspection to list all property components. They then contact contractors or subcontractors to obtain the prices of each item. The reliability of this cost data depends on how long ago the work was completed.
This method calculates the cost of short-lived assets (e.g., 5 or 7-year property) and subtracts these costs from the total project cost. The remaining amount is assigned to the building or other long-lived assets.
The sampling approach reduces the costs and resources required for the study but may be less accurate. Specialists perform a cost segregation study on a sample of a large portfolio of properties. They develop a standard model for each facility type based on these results, which is then applied on a percentage basis to other properties. This method is suitable for firms with many properties.
In summary, each approach to cost segregation has its strengths and weaknesses. The choice of method depends on the specific circumstances of the property and the available documentation. Working with experienced specialists ensures that the most appropriate approach is used, maximizing accuracy and tax benefits.
Pros and Cons of Cost Segregation
- Accelerated Depreciation Deductions: Allows for faster depreciation of property components, leading to larger tax deductions in the early years
- Increased Immediate Cash Flow: By accelerating deductions, property owners can improve their cash flow quickly.
- Possibility of Retroactive Tax Savings: Property owners can amend previous tax returns to claim missed depreciation deductions.
- Creation of Detailed Asset Analysis: Provides a thorough breakdown of property components, aiding in asset management and future planning.
- Potential for Partial Disposition Deductions: Allows for deductions when parts of the property are replaced or disposed of, without needing to wait for the entire building to depreciate.
- High Cost of Conducting the Study: Cost segregation studies can be expensive, requiring significant upfront investment.
- Increased Risk of IRS Audit: Detailed and accelerated depreciation claims may attract closer scrutiny from the IRS.
- Potential for Recapture of Accelerated Depreciation: If the property is sold, the IRS may recapture the accelerated depreciation, resulting in higher taxable income.
- Complex Study Process: Conducting a cost segregation study is intricate and time-consuming, requiring expertise and detailed documentation.
Concerned about potential issues associated with conducting a cost segregation study? Click here to learn more about common cost segregation concerns and their solutions.
When and How Often Shoul I Do A Study?
Optimal Timing Performing a cost segregation study at the time of the original purchase is ideal. This timing sets a clear baseline, making it easier for both you and the IRS to document and validate the reclassification of property components. Conducting the study before any renovations or improvements ensures that the baseline is accurately established.
Pre-Rehab vs. Post-Rehab
- Before Rehab: An engineer documents the property's current state, simplifying the reclassification process.
- After Rehab: Post-renovation, you’ll have receipts and invoices detailing the costs of new items. With a pre-rehab cost segregation report and these documents, you can apply bonus depreciation, partial disposition elections, and repair rules effectively.
Process and Benefits When you commission a cost segregation study, our team will:
- Classify/Reclassify Components: Each building component is assigned an appropriate tax life according to IRS guidelines.
- Allocate Indirect Costs: We allocate indirect costs to each asset.
- Prepare a Detailed Report: This includes asset details supporting the reclassifications and completion of the necessary tax forms.
Expert Handling After commissioning your study, we manage all the details, working to secure the best possible tax advantages for you. With over 30,000 studies completed in the past 20 years, we have the expertise to maximize your tax savings.
Significant Savings Our clients save an average of $200,000 by commissioning a cost segregation study with us. You may be able to recoup even more. Contact us to discover the potential tax savings we can deliver.
Reviews & Testimonials
NYCCPA Pros have been an absolute lifesaver for my small business. Their attention to the details and expertise in tax preparation saved me a significant amount of money
John T.
The team at NYC CPA Pros is incredibly knowledgeable and professional. They handled my personal and business taxes seamlessly, provide peace of mind and top-notch services.
Lisa M.
Frequently Asked Questions
A cost segregation study analyzes your building’s subcomponents, such as lighting fixtures, heating and air conditioning systems, and other elements that deteriorate over time. It assigns shorter lifespans (typically 5 or 15 years) to these components, allowing you to accelerate depreciation and write off significant amounts in taxes due to their aging.
A cost segregation study typically costs between $3,000 and $12,000. This investment is worthwhile considering the potential tax savings, which can amount to hundreds of thousands or even millions of dollars. The return on investment (ROI) for a cost segregation study is substantial.
You can commission a cost segregation study at any time, but it’s best to do it before starting any construction rehab. Performing the study before renovations allows for accurate baseline documentation, simplifying the reclassification process for both you and the IRS.
Absolutely. The 2017 Tax Cuts and Jobs Act allows for immediate deduction of the full costs in the first year. By reallocating some of your building’s assets to shorter lifespans, you can qualify for substantial bonus depreciation in the first year, even for properties with a 27-year class life.
No, a cost segregation study should be conducted by an experienced team of licensed engineers and accountants. These professionals are qualified to analyze and reclassify your building’s subcomponents, ensuring accuracy and maximizing tax benefits. DIY efforts could lead to missed opportunities for tax savings and potential compliance issues.
If a cost segregation study is performed incorrectly, you may end up paying more taxes than necessary. Hiring an experienced team of licensed engineers and accountants is crucial to accurately analyze and reclassify your building’s subcomponents, thus ensuring compliance and maximizing tax benefits.
The bonus depreciation sunset occurred on December 31, 2022, but was extended through 2027 by the Consolidated Appropriations Act, 2021. The allowed bonus depreciation percentages for the coming years are as follows:
These percentages represent the allowable bonus depreciation for each year, providing a timeline for planning your cost segregation strategy effectively.
