What is Cost Segregation?
Cost segregation is an advanced tax planning strategy utilized by real estate investors to accelerate the depreciation of certain components of their properties. As a result, the benefits of cost segregation can mean reduced tax liability, leaving more cash in the pockets of the investors.
Think of it this way, the benefits of cost segregation are comparable to borrowing money from the government – interest-free. Allowing you to do whatever you want with the cash – use it to make improvements on the building, or better yet – use it for the down payment on your next acquisition.
Let’s dive in.
Your building has value – and over time that value depreciates due to normal use and deterioration. In years past – the IRS considered a building as a single asset which was depreciated straight-line, over 39 years for non-residential commercial properties, or 27.5 years for commercial residential properties.
What does this really mean? Let’s say you own a non-residential commercial building. During the first 39 years of ownership, you get a tax deduction of 1/39th of the building’s value, each year.
Although these depreciation expenses are helpful at tax time, there’s a smarter way to do it.
We all know well that most components within a building don’t last 39 years. Over time, the law has evolved to align with this reality. Today, pieces of the building like carpeting, specialty lighting, certain plumbing fixtures, and landscaping can be “segregated” from the building.
With Cost Segregation, an IRS approved technique, these segregated assets can be expensed faster, on a 5, 7 or 15-year schedule, based on their individual depreciable lives – as opposed to being part of the building’s 39-year straight-line depreciation schedule.
What does this mean for you? Cost Segregation is a great strategy for helping you grow your net worth faster by significantly reducing your current tax liability, using the upfront cash for additional investing.