Real Estate Investors Can Maximize Their Property’s Profitability With Cost Segregation

Real Estate Investor and foreman wearing hardhats discussing floor plans on site standing by unfinished flight of stairs

Real Estate Investors Can Lower Their Property Income Tax  and Generate Direct Cash Flow by Taking Advantage of Certain Tax Tools

When it comes to investing in property, many real estate investors who currently own, or who are looking to gain more property, often overlook an extremely beneficial and strategic tax tool that can help them save significantly on their taxes and give room for property expansion. This tool is what tax experts call cost segregation.

Simply put, cost segregation is a way property owners and investors can create direct cash flow by accelerating the rate at which certain assets on their property depreciate. Normally, residential and commercial properties have a straight-line depreciation of 27.5 years for residential and 39 years for commercial. However, cost segregation can accelerate this rate for certain interior and exterior components of a property by 5, 7 or 15 years.

Real estate investors are then able to write off more assets on their income taxes which brings money to their pocket. Not only is this beneficial to the particular property being claimed, but it’s also a benefit for investors looking to expand their real estate in certain industries such as hotels or apartments. Since the property is depreciating over less time, this gives investors more money to invest in properties now rather than later.

How Does Cost Segregation Work & Who Benefits?

In order to take full advantage of all the benefits cost segregation can offer for your property, a formal cost segregation analysis needs to be performed.

The analysis will take certain qualified permanent assets (electrical systems, ventilation systems, special plumbing, storage tanks) and changeable assets (light fixtures, wall coverings, phone systems, etc.) and separate them based on their depreciation. These assets are determined differently depending on the property and project type.

Cost segregation studies tend to benefit owners of larger multi-family properties or investors of commercial real estate because they usually receive sizable reductions in their federal tax income that will cover the cost of the study.

Most investors who want to undergo a cost segregation study should take advantage of it immediately after the purchase, remodel, or construction of a property, or within the first year after these events to receive the maximum tax benefits however, there are opportunities to look back at past years as well.

Additional Depreciation For Assets

Another great advantage to a cost segregation study is an additional depreciation bonus for certain qualified assets within your property.

Under a new provision that was passed by the IRS under Section 179, investors are able to write off 100% of certain qualified assets in the first year of purchase. These assets are identified and factored in during a cost segregation study.

The deduction will only be in effect until 2022 and is said to phase out completely by 2027.

What Are Your Next Steps?

If you’re an investor looking to take advantage of cost segregation and want to have a cost segregation analysis performed for your properties, our qualified team of tax experts are here to help.

Our teams can survey properties on-site anywhere in the country and will draft up a detailed report for you while walking you through the step-by-step process of the study to make sure you’re getting the most savings.

The potential benefits can give you the opportunity to expand future investments and make the most profit out of your properties. Call National Tax Group at (561) 257-3436 to set up your free initial consultation.

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