Are you a commercial real estate owner looking for ways to optimize your tax strategy and maximize your savings? If so, you might want to consider cost segregation. This powerful financial tool allows property owners to accelerate depreciation on specific components of their building, potentially leading to significant tax benefits. In this blog post, we'll dive into the fundamentals of cost segregation and explore how it can work for you.
What is Cost Segregation?
Traditionally, property owners calculated depreciation by spreading the improved value of their building over 27.5 or 39 years. Cost segregation, however, takes a different approach. It involves a detailed study that dissects a property into distinct components, allowing owners to depreciate these components over shorter time periods.
The Impact of Tax Legislation
The Tax Cuts and Jobs Act of 2017 brought about significant changes to cost segregation. It expanded bonus depreciation to include more assets and allowed for 100% bonus depreciation. While the eligibility criteria remain unchanged, the amount eligible for bonus depreciation has started to decrease by 20% annually from 2023 onwards. This means that in 2023, bonus depreciation stands at 80%, dropping to 60% in 2024, until it phases out completely.
Now, you might be wondering, is this really an advantage, and who should take advantage of it? Let's explore the pros and cons of cost segregation to help you decide if it's right for you.
Pros and Cons of Cost Segregation
1. **Tax Savings**: Cost segregation can lead to substantial tax savings by accelerating depreciation on certain components of your property.
2. **Improved Cash Flow**: By reducing your tax liability, you can free up cash for other investments or operational needs.
3. **Correcting Previous Depreciation Errors**: You can potentially amend past tax returns to recover overpaid taxes.
1. **Initial Cost**: There are costs associated with conducting a cost segregation study.
2. **IRS Scrutiny**: The IRS may review your cost segregation study to ensure compliance with tax regulations.
3. **Property Sale Implications**: When you sell the property, you might face recapture taxes on the accelerated depreciation.
Who Should Consider Cost Segregation?
Cost segregation is particularly beneficial for owner-users of commercial real estate. If you own and occupy your office building, for example, cost segregation can be a valuable tool to enhance your tax strategy.
How Does Cost Segregation Work?
In a cost segregation study, a property is divided into three main categories:
1. Land: The portion of the property that cannot be depreciated.
2. Structure: The core building itself.
3. Personal Property: This includes items like flooring, doors, cabinets, and exterior improvements such as landscaping and signage.
While real property components typically depreciate over 27.5 years, personal property components can depreciate over much shorter periods, ranging from five to 15 years, depending on the specific element. This disparity in depreciation periods can result in substantial tax savings.
In conclusion, cost segregation is a powerful financial strategy for commercial real estate owners looking to optimize their tax position. If you're interested in exploring how cost segregation can benefit your specific situation, don't hesitate to reach out to us for a free review. It could be a game-changer for your financial future. So, for all your cost segregation needs, contact us today!
You can reach our CEO and founder Peter Ellefson anytime at Peter@eplfs.com
Disclaimer: Laws and regulations are subject to change, and readers are advised to consult EPL advisors for personalized advice and compliance with specific state requirements. This information is not specific advice and is meant for general education.