Cost Segregation is a tax planning tool commonly used by many real estate investors to strategically identify what property related costs can undergo accelerated depreciation. Accelerated depreciation decreases the book value of an asset faster than standard depreciation by shortening the depreciable life of certain assets. Rather than following the typical 39-year depreciation lifespan of a commercial property, cost segregation allows for certain personal property or land improvements to be depreciated over 5,7 or 15 years. The primary goals of cost segregation are identifying certain interior and exterior components of a building that can be depreciated faster and establishing the depreciable tax value for each of these components. Some examples of components that may be eligible for cost segregation include rooftops, HVAC units, and windows. A cost segregation study dissects the elements of a property and divides them into different categories.
WHAT ARE THE BENEFITS OF COST SEGREGATION?
Cost segregation yields numerous benefits for real estate investors. One of the major advantages is that it initially decreases taxable income and taxes, which creates a time value of money benefit. Additionally, cost segregation recognizes and quantifies the value of an asset, so that it can be written off as a “retirement loss” or “partial deduction” when it comes time to replace the component. Furthermore, conducting a cost segregation study provides a thorough analysis of assets that will fulfill IRS requirements.