COST SEGREGATION
It isn’t what companies make that counts, it’s what they keep after taxes.
Cost segregation is an often overlooked tax strategy that can increase your cash flow immediately. By correctly reclassifying certain fixed assets as personal property instead of real property, you can accelerate depreciation and significantly reduce your tax liability.
How Does Cost Segregation Work?
Cost segregation is the process of identifying and separating construction-related personal property assets from real property assets and then calculating the correct depreciated value of those reclassified assets. This process can help companies and property owners save on taxes and boost cash flow, so you can reinvest into the property or issue distributions to shareholders.
To get started, companies or owners commission a cost segregation study performed by tax depreciation experts and engineers who understand how the IRS thinks about various assets and the “why” behind asset lifecycles. The study breaks apart critical operational elements from complex structural, mechanical, electrical, plumbing, and security elements within your building, as well as decorative elements. It then accurately reclassifies eligible elements as personal property or land improvements.
RealProperty
- 5- or 39-year straight-line depreciation
- Land and structures
Personal Property
- 5- or 7-year depreciation
- Items attached to a building or land, but not required for operation of the building, including:
- Decorative light fixtures
- Carpeting
- Window treatments
- Millwork
- Cabinetry
- Removable walls
- Office furniture
- Security systems
- Audio/visual equipment
- Telecommunications systems
Land Improvements
- 15-year depreciation
- Part of real property, but with faster depreciation allowed. Includes:
- Parking lots
- Sidewalks
- Fencing
- Landscaping
- Stormwater drainage
- Retaining walls
- Some signage
There is a reason the IRS has set up different depreciation times – they understand that certain items do not last very long. Since you are guaranteed to have to update your decorative elements, office furniture, and mechanical fixtures every few years, it does NOT make sense to straight-line depreciate certain improvements included with a building.
4 Kinds of Cost Segregation Studies
Which type of study it right for your needs?
New Construction Tax Engineering
Use this before new construction to optimize your tax benefits immediately.
Cost Segregation Study
Useful any time, but especially when new construction is completed and during or just after a building purchase to free up cash flow quickly.
Depreciation Look-Back Study
Recover overpaid taxes on buildings you’ve owned for years or if your last cost segregation study was accounting based.
Retirement Study for Renovation
Use before a renovation to claim extensive tax write-offs from discarded materials.
Is Cost Segregation Right for You?
Some companies and property owners benefit from cost segregation, others do not.
Yes, if:
- You have a high-value property
- You plan to significantly improve a lower-value property
- You have substantial taxable income
- You have valuable equipment inside your building
- You are building a new property
- You are planning to purchase or already own a building
No, if:
- You have an existing net operating loss (you don’t need additional deductions)
- You plan to sell the property soon (ROI on the segregation study won’t be recouped)
- You have a residential rental property passive investment that is NOT earning a taxable profit yet (you can’t depreciate this until you earn a profit)