Do you own real estate? No matter if you have constructed, purchased, or renovated real estate, there’s a tax planning tool that may help you that is often overlooked: cost segregation planning. Very basically, cost segregation planning is a tax strategy tool that allows companies and individuals who own real estate to help maximize their tax benefits. Let’s expand on that definition a bit, and go deeper into what cost segregation planning is, and how it can benefit you.
Real estate is one of the few investments you can make that you can expense. When you purchase a building, you’re not just purchasing the structure. You are also purchasing all of the building’s interior and exterior components. Oftentimes, components in that building can be expensed much quicker than the rest of the building structure.
A cost segregation study is a method by which you determine which elements of the building depreciate quickly. Because some property-related elements depreciate faster than the building itself, you can expense them sooner, maximizing your tax benefits. A cost segregation study can usually reclassify 20-40% of a building’s components. For example, qualifying assets are often buried in categories that depreciate in 39 or 27.5 years. A cost segregation study can find those elements and reclassify them to a depreciation category of 5, 7, or 15 years. This reclassification process can help reduce tax bills and increase cash flow. Many types of facilities can benefit from this process, including but not limited to apartment buildings, banks, car dealerships, manufacturing facilities, office buildings, and hotels and motels.
A finished cost segregation report is submitted to the IRS, and it is a living document. It can be revisited every year, as the building changes. New components can be expensed as the building ages and the study is updated. You made an investment up front in your real estate, and now you can mitigate depreciation recapture for additional expenses. Think of this report as a blueprint for your building’s value, meaning you can plan ahead for accelerating write-offs, preserving wealth, and maximizing building value.
If you want your real estate investment to be tax-efficient and help you preserve your wealth, then cost segregation planning can certainly help. If you’re interested in a cost segregation study for your real estate, or still have questions, Engineered Tax Services is here to serve you.
The experts at Engineered Tax Service are ready to help you with cost segregation planning.