Cost Segregation studies allow tax payers to capture accelerated depreciation deductions by reclassifying components of a building into accelerated recovery periods Most commercial properties are depreciated over 39 or 27.5 years. Cost segregation studies are an approved method from the IRS that requires engineers and CPAs to reclassify portions of commercial properties to shorter depreciation lives, as short as 5 years. These accelerated deductions apply to both federal and state income taxes, allowing for significant cash flow increases.
Any commercial property is eligible for a cost segregation study. For every dollar, a cost segregation reclassifies from 39-year property to 5-year property results in an estimated 22 cent benefit. Cost segregation studies can provide a substantial return on investment. A top-quality CPA firm with high-quality cost segregation services will be able to provide a fee proposal and estimated tax savings to determine the cost/benefit of the analysis and compliance. Contact Camuso CPA PLLC (CamusoCPA.com) today for a free initial consultation regarding a comprehensive cost segregation study, if eligible you will receive a free quote.
An apartment building with a tax basis of $1.5 million, with one year of standard 27.5 year accumulated depreciation can accelerate $263,424 in tax deductions in just 4 years with $143,314 in year 1.
Take a look at the chart below for an illustration, the red represents the accelerated cash return from the cost segregation study while the yellow represents a conservative estimated rate of return you can get from the accelerated cash flows.
Technology Disruption Offers Opportunity to Small Investors and Small Businesses
Traditionally, many CPAs do not have the expertise and depth within their professional network to deliver cost segregation studies.
Our team (CamusoCPA.com) and systematic process takes a comprehensive approach to cost segregation, by leveraging our network of licensed professional civil engineers, cutting edge technology and top-tier knowledge our team can efficiently do properties of any size.
Cost Segregation is now cost effective for smaller properties by using cutting edge technology and online software designed for CPAs who are strategically aligned with engineers that are experts in cost segregation.
Traditionally, cost segregation studies would only be recommended for larger properties with a tax basis over $1,000,000. The cost segregation industry is being disrupted, offering a great opportunity to smaller investors and business owners who can recognize this opportunity and capitalize on it to accelerate cash flows to improve their business or secure an additional strategic investment on properties with a tax basis as lows as $100,000 to $200,000.
Here is an additional article regarding technology disruption in the cost segregation industry: https://www.linkedin.com/pulse/technology-disruption-offers-tax-maximazation-small-camuso-cpa
The cost segregation process utilizes an engineering approach to identify assets that can be reclassified for accelerated depreciation, evaluating all available information and presenting the conclusions in a professionally documented format.
- Review of all cost detail for the property
- Inspection of facilities
- Review of all blue prints
- Reconciliation of all construction costs and estimates to the actual amounts incurred by tax life
- Pro-rata allocation of soft costs
Tax regulations allow for taxpayers to retrospectively capture missed deductions provided by a cost segregation study.
Cost segregation studies can be performed at any time but in order to maximize tax deductions one should be performed as soon as possible.
Estate Planning Opportunities
Cost segregation studies can be a powerful estate planning tool. Cost segregation studies offer an additional opportunity to reduce the decedent’s original tax basis for real estate assets that are recorded on their tax depreciation schedule before death. A cost segregation study can be done after a death occurs, but must be completed before filing the decedent’s final income tax return.
This can generate accelerated depreciation that can eliminate tax owed on the final federal income tax return, while reducing the building’s pre-stepped up tax basis. Since the federal income tax basis of the building is reset to fair market value on the date of death, neither the decedent nor the heirs realize any offset to future deductions typically associated with cost segregation studies.
Additionally, the recapture tax that is paid upon sale of the property on the accelerated depreciation deductions does not occur in estate planning situations.
Cost segregation studies can be combined with 1031 exchanges as a powerful tax planning toolset, allowing investors to accelerate the growth of their portfolios by capturing large tax deductions and deferring gains on the sale of properties.
Additionally, cost segregations can be combined with other studies, incentives and tax planning strategies including bonus depreciation, 179D Deductions, 45L Energy Credits, Insurance Replacement Appraisals, Tangible Property, Repairs & Maintenance Studies and much more.