Cost Segregation Studies
Whether you are constructing a new building, remodeling a current facility, or purchasing land or buildings, asset depreciation decisions are critical. A cost segregation study is the best way to ensure nothing is being missed. In a cost segregation analysis, the real estate assets eligible for more rapid depreciation are identified and segregated. The result? You may save thousands of dollars in after-tax income.
How Does it Work?
A cost segregation study is a strategic tax tool which looks for all possible opportunities for accelerating depreciation. Depreciation and amortization deductions reduce your taxable income without requiring a current cash outlay. Increasing your depreciation/amortization deductions is, in effect, a cash-free technique for enhancing after-tax income. Unfortunately, many taxpayers improperly classify "building" assets, causing income taxes to be paid sooner than necessary.
What Is It Worth to You?
Generally, owners of commercial buildings must depreciate buildings and structural components over a 27.5- or 39-year period. However, there is an opportunity to write off some of the assets installed in or associated with a building, if they are not structural components of the building itself, by assigning depreciable lives of five, seven or fifteen years. Savings are achieved by reducing tax liability in earlier years, thus enhancing cash flow. The potential savings realized from a cost segregation study will vary based on a number of factors, including your effective tax rate--but it is not unusual to obtain savings approaching $50,000 on projects as small as $1,000,000 in total development costs.
When Should a Cost Segregation Study Be Done?
Ideally, tax planning for real estate depreciation and amortization should begin prior to the construction or acquisition of the property, when you have the greatest flexibility in planning options. However, an analysis can be started as early as the beginning of the design process and as late as years after completion of the property. In fact, benefits may be realized from real estate constructed or purchased as far back as 1987. Proper planning will allow you to maximize your deductions now.