Cost segregation is one of the most powerful tools available to property owners in the United States when maximizing their tax savings. This strategic approach allows you to accelerate depreciation deductions on specific assets within your property, leading to significant tax deferrals and improved cash flow. However, navigating the complexities of a cost segregation study can be daunting without the right guidance. To help you make the most of this opportunity, here are the top 7 tips you should know about cost segregation.
1. Understand the Basics: What is a Cost Segregation Study?
A cost segregation study is an IRS-approved method of reclassifying components and improvements of a property from real property to personal property. This reclassification allows for a faster depreciation timeline, which means you can claim more depreciation deductions sooner, reducing your taxable income. Instead of depreciating assets over the standard 39 years for commercial property or 27.5 years for residential property, a cost segregation study can reassign assets into shorter recovery periods, such as 5, 7, or 15 years.
2. Engage Qualified Professionals: Expertise Matters
While it might be tempting to try and perform a cost segregation study on your own, the IRS requires professionals with expertise in engineering, construction, and tax law to conduct these studies. With a thorough analysis and site visit, a qualified cost segregation specialist will identify assets that can be reclassified for accelerated depreciation. The accuracy and defensibility of your cost segregation study hinge on the qualifications of the professional conducting it, so ensure you partner with a trusted provider like National Tax Group, which has a team of experts in this field.
3. Timing is Everything: Conduct Studies Early
The best time to perform a cost segregation study is immediately after a property is placed in service. This timing allows you to maximize your tax benefits from day one. However, if you missed this window, don’t worry—cost segregation can still be performed retroactively using a “look-back” study. This approach allows you to claim missed depreciation deductions from prior years, giving you a significant one-time tax benefit. It’s a powerful strategy to catch up on potential savings you might have overlooked.
4. Consider All Property Types: Beyond Just New Construction
Cost segregation isn’t just for newly constructed or newly acquired properties. It’s also a valuable tool for renovations and older properties. For instance, if you’re planning a major renovation, performing a cost segregation study beforehand allows you to identify assets that will be retired. By doing so, you can take advantage of the Partial Asset Disposition (PAD) election, writing off the remaining basis of these assets in the year they are removed. This can result in substantial tax savings and should be a key consideration in your renovation planning.
5. Don’t Overlook Bonus Depreciation: A Key Benefit
The Tax Cuts and Jobs Act (TCJA) significantly changed bonus depreciation rules directly tied to cost segregation. Bonus depreciation allows you to immediately write off a percentage of the cost of certain assets with a class life of 20 years or less. Initially set at 100% for assets placed in service between 2017 and 2022, the bonus depreciation rate has begun to decrease, but it remains a powerful incentive. By identifying eligible assets through a cost segregation study, you can take full advantage of this provision, boosting your immediate tax savings.
6. Evaluate the Cost vs. Benefit: Is Cost Segregation Worth It?
While cost segregation can offer substantial tax benefits, it’s important to weigh these against the cost of the study itself. Generally, properties valued at $500,000 or more are ideal candidates for cost segregation, as the potential tax savings often outweigh the cost of the study. However, every property is unique, so it’s crucial to consult with a tax professional to determine if a cost segregation study is a smart investment for you.
7. Stay Informed: Leverage Ongoing Tax Planning
Cost segregation should not be a one-time exercise. As tax laws and regulations evolve, so too should your tax strategies. A proactive tax professional can help you periodically revisit your cost segregation study to ensure you’re taking full advantage of any new tax incentives or legislative changes. By staying informed and revisiting your cost segregation strategy, you can continue to optimize your tax position over time, feeling proactive and in control of your financial situation.
Ready to Maximize Your Tax Savings and Improve Your Cash Flow?
Cost segregation is a proven strategy to accelerate depreciation deductions, reduce taxable income, and improve cash flow. However, the process is complex and requires specialized knowledge. At National Tax Group, our team of experts is here to help you navigate the intricacies of cost segregation and maximize your tax benefits. Contact us today for a zero-cost consultation and take the first step towards optimizing your tax savings!