Reduce You Tax Liability
Cost segregation is a powerful tax strategy that can significantly impact your bottom line. Whether you own commercial or investment property, understanding the pros and cons of cost segregation is essential. Let’s dive into the benefits:
Reduce Your Tax Liability
Without cost segregation, your property is depreciated over long periods (27.5 years for residential and 39 years for commercial). However, cost segregation breaks down various building components (from appliances to landscaping) and categorizes them. These components can be depreciated on an accelerated schedule of five to 15 years. Accelerated depreciation increases your deductions, leading to a lower tax bill and, in some cases, even a tax refund.
Retroactively Claim Depreciation
Missed the initial cost segregation study? No worries! With a look-back study, you can retroactively accelerate depreciation on qualified components. This can lower your tax liability and, for some business owners, result in an IRS tax refund. The best part? You don’t need to file an amended return; just submit IRS Form 3115 to change your accounting method.
Cash In On Bonus Depreciation
In addition to accelerated depreciation on building components, you can claim bonus depreciation. The Tax Cuts and Jobs Act allows property owners to write off 100% of eligible property costs in the first year. Although bonus depreciation will phase out starting in 2027, it’s still available at varying rates until then:
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
Taking advantage of this immediate deduction can result in significant tax savings for property owners.
Increase Cash Flow
Cost segregation frees up cash flow by reducing your tax burden. These additional funds can be reinvested in your business or other properties, allowing for further growth and expansion.
Optimize Purchase Price Allocations
When acquiring properties, cost segregation helps you allocate the purchase price more effectively. By identifying short-lived assets separately, you can maximize depreciation deductions and improve your overall financial position.
Determine True Insurable Replacement Cost
After exclusions, cost segregation provides a clearer picture of your property’s true insurable replacement cost. This knowledge is crucial for insurance coverage and risk management.
Establish Real Market Value
By factoring in exemptions, cost segregation helps establish the real market value of your property. This information is valuable for financial planning, refinancing, and property transactions.
In summary, cost segregation isn’t just about tax savings—it’s about unleashing hidden value within your property. Consult with a tax professional to determine if cost segregation is right for your situation. Remember, every property is unique, and the benefits may vary.