A cost segregation study can help commercial property owners reduce their tax burden and maximize depreciation deductions. Many property owners and investors are unaware of this powerful tool, which could save them a lot of money.
What Is a Cost Segregation Study?
For tax purposes, residential rental properties are depreciated over 27.5 years, while commercial properties are depreciated over 39 years. However, a property is not just a structure but includes personal property components that can be depreciated over a shorter period, typically five, seven, or 15 years. A cost segregation study is a process that splits the different elements of a property into categories, allowing you to benefit from an accelerated depreciation timeline for some of those building components.
Why Is a Cost Segregation Study Important?
Cost segregation can provide significant financial benefits by increasing cash flow over several years. Although there is an upfront cost for the study, the tax savings from accelerated depreciation deductions outweigh the initial cost. However, it’s essential to note that these benefits may only apply if you plan on holding the property for the long term because any up-front benefits reverse upon the sale of the property.
Who Performs Cost Segregation Studies?
A team of tax advisors and engineers typically conducts a cost segregation study. They work together to decide which building components should go into each category and how much each element costs on its own.
How Does Cost Segregation Work?
The team reviews property records, cost details, and blueprints, and performs a physical inspection of the
property to identify all property-related costs that can be depreciated over five, seven, and 15 years.
When Is the Best Time to Conduct a Cost Segregation Study?
The best time to conduct a cost segregation study is in the year the building is acquired, constructed, or
remodeled. However, a look-back study can be done at any time, and resulting write-offs can be claimed
without amending prior-year tax returns.
Cost Segregation Services and Advisors at The Whitlock Co.
Each commercial property is unique, and cost segregation studies require a team of experts. If you’re interested in determining whether a cost segregation study is right for your property, contact Jennifer Cochran at The Whitlock Co. Springfield office for professional advice.