The IRS has given your home or rental house a lifespan of 27.5 years, and 39 years for a commercial property. This means you need to depreciate the property slowly over its entire lifespan. However, a cost segregation study may identify and reclassify property assets to shorten the depreciation time down to five, seven or fifteen years!
The primary goal of a cost segregation study is to identify all costs that can be depreciated over a shorter tax life than the building so that you can maximize your tax savings over several years (versus slowly spreading out your deductions over 27.5 or 39 years).
There are several benefits to having a cost segregation study:
- An immediate increase in cash flow
- A reduction in current tax liability
- The deferral of taxes
- The ability to reclaim “missed” depreciation deductions from prior years
Unfortunately, a cost segregation study isn’t as easy as filling out a few forms and submitting them to the IRS. For both new and existing properties, the IRS requires an engineering-based study to more accurately identify the various property components (such as plumbing, electrical, mechanical components, finishes and other building components) to achieve maximum depreciation benefits. The study is then used by a CPA as supporting documentation to meet strict IRS regulations. Given the costs associated with these studies, we generally only recommend them for properties valued at $1M or more.
Cost segregation studies are one of the most valuable tax-saving strategies for real estate owners today, so it comes as no surprise that these studies are becoming increasingly popular. In one instance, McGuire Sponsel partnered with James Moore to perform a cost segregation study on two motor sport and car dealerships in Melbourne, Florida. The investment and total depreciable basis of the property totaled $4,447,652; however, 40 percent of the total depreciable property was able to be reclassified into 5, 7 or 15-year property. The accelerated depreciation deductions resulted in an increased cash flow of $523,472 over the first five years and a net present value of $698,738 over the life of the investment.
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