Cost segregation studies are a means to achieving powerful tax savings by more finely categorizing building components for accelerated depreciation.
Large owners of commercial property can save millions of dollars in taxes, but even smaller entities can slash their taxes substantially. Many property owners fail to exploit this tax advantage because they harbor misconceptions about it.
Let’s address those myths:
Myth #1: Cost Segregation Studies are too expensive for us.
There is a cost to hiring a tax consultant to conduct a cost segregation study. Moreover, the engineering fees associated with a cost segregation study are tax deductible. A credible tax consultant will assess your situation and advise you whether a study is warranted. But on average, the ROI on cost segregation studies is about 10:1. A dollar invested yields $10 saved.
Myth #2: Cost Segregation Studies are too complex and time consuming for us.
That is why you hire a qualified tax consultant who does almost all the work. While you need to gather documents, the tax consultant conducts the analysis, reclassifies building components into their appropriate depreciation categories and applies for the tax savings. Your main job is to save on taxes.
Myth #3: Cost Segregation Studies are only for large commercial properties.
Tax savings can significantly outweigh the cost of a study for properties with a cost basis as low as $200,000. Almost any size owner of commercial or residential rental property can benefit from a cost segregation study.
Myth #4: Cost Segregation is only for new properties.
Owners of older properties can perform retroactive cost segregation studies, called “look-back” studies by the IRS. By reclassifying building components into shorter depreciation schedules in the rear view mirror, companies can generate considerable tax savings.
Myth #5: Cost Segregation is only for certain types of properties.
Cost segregation applies to any type of commercial property that has constituent parts, like HVAC, electrical, plumbing, hot water, fixtures and floor and wall coverings that can be reclassified for accelerated depreciation. It even covers multi-family residential buildings that generate income.
Myth #6: Cost Segregation is an invitation to an IRS audit.
Cost segregation is an IRS-approved strategy, but the rules are complex and ever-changing, with five different depreciation classes and a bonus depreciation schedule that is slowly disappearing. That is why it is so important to partner with a tax consultant with engineering and accounting expertise and a track record of IRS compliance.
Myth #7: Recapture Tax When the Property is Sold Offsets the Benefits.
This is a common and powerful misconception because it is based on a truth: the depreciation must be paid back when the property is sold. But it misses several factors that make segregation worthy of consideration.
Primarily, it ignores the time value of money. The depreciation time frame for commercial properties is 39 years. One thousand dollars 39 years ago has the purchasing power today of $350, and that covers almost exclusively low-inflation years.
In addition, that $1,000 today can be put to work to generate profits. If it returns just 5% annually during those 39 years, that will equal nearly $7,000. That’s twenty times what you will owe the IRS.
Recapture is taxed at a maximum rate of 25%, less than the corporate income tax rate for many businesses today. Offsetting the hire rate and paying back at a lower rate is a good tax strategy.
Look into cost segregation
In short, cost segregation is a compelling tax savings strategy for nearly any kind of individual or business that owns commercial property of almost any kind. Find out if it can be beneficial to you by contacting National Tax Group for a no-obligation assessment.
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