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2022 Tax Planning: Benefits of Cost Segregation For Real Estate Investors

In the last few years, the real estate market has been booming. Real estate hot spots like Austin, Tampa, and Charlotte have seen massive growth. In fact, in 2022, 12% of Americans were investors in some sort of real estate whether that be commercial or residential. There are so many benefits to being a real estate investor but one of these benefits is the tax-saving opportunities. Property owners may find tax savings opportunities in accelerated depreciation during the review of their property through a cost segregation study. Our cost segregation experts are here to break down how you can save money on your property.

What is a Cost Segregation Study?

A cost segregation study is a strategic tax planning tool that is used to maximize federal income tax depreciation deductions by identifying fixed assets and their costs. This engineering-based study gives you an exact tax plan to accelerate property depreciation and helps cut your costs on any real estate that has been constructed, remodeled, or purchased. It allows for real and personal property to be categorized into acquisition/construction costs and applied to the appropriate IRS tax credit.

Within a cost segregation study, real estate is broken into two categories, land and building. Land is not depreciated, however, the building is depreciated over 27.5 years, if residential, and 39 years, if commercial. With a cost segregation study, however, certain interior and exterior aspects of a property can be broken up into sections that depreciate over the course of 5, 7, or 15 years instead. This allows you to accelerate the depreciation of your property on paper to reap certain benefits. 

Benefits of a Cost Segregation Study

A cost segregation study can reduce the taxes you need to pay on a property and increase cash flow. You are basically front-loading your depreciation benefits with the understanding that a dollar saved in the first five years is more valuable than a dollar saved in 18. Your net present value savings are much higher. 

Completing a cost segregation study generates immediate cash flow. Through accelerated depreciation tax deductions, real estate investors can get a large sum of cash to offset the cost of construction, reinvest in the property, or keep it for future projects. 

Another benefit of a cost segregation study is the ability to create new write-offs. Under a cost segregation study, the major components of a property are quantified. Leasehold improvements are also quantified under a cost segregation study. This quantification means that when those components and improvements are renovated or replaced, they can be written off. 

A cost segregation study also provides the benefit of third-party review. Having an independent third-party analysis is beneficial not only to optimize your potential benefits but also for the IRS. A third-party review that will withstand IRS review is crucial to maximizing your tax benefits and credits. 

How to Conduct a Cost Segregation Study 

A certified engineer will conduct the cost segregation study. The process typically begins with a feasibility analysis. Then other information like an appraisal, a property condition report, project and contractor costs, vendor invoices, etc. are all gathered to have the property analyzed. Lastly, a report is compiled including the results of the study, methodology, photos of the property, and tax law supporting the asset classifications. This report should be kept for as long as you own the property. 

National Tax Group is here to help with all cost segregation study needs. We partner with certified public accounts nationwide to help clients optimize their taxes, and we specialize in cost segregation. To learn more about how we can help in your cost segregation journey, visit us online or call today!