Commercial property investors who have recently acquired or are building a commercial property, should know about the advantages of having a Cost Segregation Study performed for their business. Cost Segregation is a process by which commercial property owners can accelerate depreciation and reduce the amount of taxes owed. Depreciation is a deduction that real estate investors can claim on their income taxes each year to help them recover the costs related to that property. By using this process, you can reduce the amount of money owed on your income taxes each year. This also reduces the expenses of owning investment real estate which in turn frees up cash flow for other investments.
The term “Cost Segregation” (also known as Cost Allocation) comes from the need to make the distinction, for income tax purposes, between real property and personal property, which together constitute a commercial property. Ideally, you should order a Cost Segregation Study during the same year you purchase, build or remodel an investment property. If you did not perform a Cost Segregation Study when you first built, purchased or remodeled a property, you have the option to order a look-back study. This type of Cost Segregation Study allows you to claim a catch-up tax deduction, which you could claim in a single year. Look-back studies are allowed on properties that you bought, built or remodeled as far back as January 1, 1987.
Cost Segregation Studies, which analyze the components that make up the building and assign these various components with recovery periods, can provide property owners with distinct tax advantages over the straight-line depreciation method. This system allows you to speed up the depreciation schedule, increasing the amount you can deduct each year which could mean a savings of more than 20% on taxes for the depreciation of the non-permanent, non-structural assets of their commercial investments. Currently, the rate of depreciation for real commercial property is 39 years. The purpose of a Cost Segregation Study, then, is to separate the personal property assets from the real property assets and identify and properly classify the non-structural systems and components of a commercial property so that, under IRS guidelines, the depreciation of certain qualifying assets can be accelerated to 5, 7 or 15 years instead.
Contact us now for more detailed information on a Cost Segregation Study for your investment properties.