Cost segregation is a highly beneficial and widely accepted tax planning strategy utilized by commercial real estate owners to accelerate depreciation deductions, defer tax, and improve cash flow.
A cost segregation study is based on a detailed engineering analysis that is used to support the acceleration of depreciation deductions by identifying costs that can be allocated to shorter recovery periods; primarily 5, 7, and 15-year, as opposed to 27.5 (residential rental) or 39-year (commercial). A quality study provides the documentation needed to defer substantial tax payments and greatly improve cash flow. It is important to note that a cost segregation study does not create new deductions, but increases deductions in the early years of ownership. This front-loading of depreciation allows the taxpayer to take advantage of the time value of money.
There are a number of benefits associated with cost segregation and its various applications. The primary benefit is significantly improved cash flow. This is most often achieved through the acceleration of depreciation deductions and the resulting tax deferral. In addition to the impact of accelerated depreciation, cost segregation may also allow for…
- Reduction of estimated quarterly tax payment.
- Property tax savings.
- Transfer tax savings.
When prepared correctly, a cost segregation study can also be an excellent asset management tool.