Even the most savvy investors and tax experts often avoid the topic of cost segregation. It’s complicated, and a careful reading of tax code doesn’t do much to clear things up. Most IRS-approved applications of cost segregation were developed through individual rulings, rather than written into tax regulations, making it a challenge to get a complete listing of the requirements. However, with a little help from your Certified Tax Coach, you can master this method of depreciation and bring your total tax liability down.
The Basics of Cost Segregation
If you don’t know much about cost segregation, you aren’t alone. It is a tax strategy that most real estate investors pass up altogether – but you don’t have to be one of them. At its most basic, cost segregation is another way to look at asset depreciation. As you probably already know, you can depreciate the value of improvements on your property over time. For example, non-residential buildings depreciate over 39 years – their estimated useful life. Residential buildings depreciate over 27.5 years. Of course, the longer the period of depreciation, the less impact this deduction has on your current tax liability.
Cost segregation separates each element of your property, so that you can depreciate certain components over a shorter period. For example, personal property and land improvements can be depreciated over periods that range from five to fifteen years, which has a substantial impact on your tax bill.
Getting Started with Cost Segregation
It is a common misperception that the IRS frowns upon the practice of cost segregation. In fact, there is no indication that applying this method of depreciation has any downside from an IRS perspective, and the IRS has stated on multiple occasions that cost segregation is the correct way to depreciate real estate assets. The only caveat is that the methodology you use to determine when assets should be depreciated must meet strict standards. To ensure clarity, the agency published a comprehensive guide to approved cost segregation study practices. This guide is available on the IRS website under IRS Cost Segregation Audit Techniques Guide.
You can simplify the process of classifying assets for cost segregation by hiring a professional who specializes in cost segregation studies. These individuals use approved methodology to inventory your assets and separate personal versus real property for depreciation purposes. If you plan new construction, bring your cost segregation specialist on-board while plans are being drawn up, as an evaluation of the property before infrastructure is in place can yield valuable information for your future tax filings. If you haven’t practiced cost segregation in the past, it’s not too late. There is a lengthy lookback period, which means you could be eligible for significant savings for previous years.
Speak with your Certified Tax Coach about the potential benefits you may realize through cost segregation, and learn more about the in-depth information on eligibility requirements for taking advantage of cost segregation benefits, as well as details on how this method can save you money on your taxes.