How Cost Segregation Can Save You Money

Cost segregation in real estate is a tax strategy that can be used to maximize deductions and reduce tax liability. It involves breaking down the cost of a property into its component parts and assigning them shorter depreciation lives and higher depreciation rates. This allows owners to recoup more of their expenses in the early years of ownership, resulting in a lower overall tax burden. 

Cost segregation is most commonly used when purchasing or constructing a new property, as it allows owners to identify and assign components of the purchase price or construction costs to shorter depreciation lives. This means that instead of depreciating the entire purchase price or construction costs over the full 27.5-year depreciation schedule for residential real estate, some of the costs can be assigned to shorter depreciation lives of 5, 7, or 15 years. This results in higher depreciation deductions in the early years of ownership, reducing the taxable income. 

Cost segregation can also be used when making improvements to an existing property. When making improvements to a property, owners can break down the cost of the improvements into their component parts and assign them shorter depreciation lives. This is especially beneficial when making improvements to older properties, as they may have components that are eligible for shorter depreciation lives than the original cost of the property. 

In addition to reducing the taxable income, cost segregation can also provide other financial benefits. By assigning shorter depreciation lives to certain components of the property, owners can increase their cash flow in the early years of ownership. This can be especially beneficial for owners who are relying on rental income to cover their expenses. 

In order to take advantage of cost segregation, owners should work with a qualified tax professional. A tax professional can help identify and assign components of the purchase price or construction costs to shorter depreciation lives, maximizing deductions and reducing the overall tax burden. 

In summary, cost segregation in real estate is a tax strategy that can be used to maximize deductions and reduce tax liability. It involves breaking down the cost of a property into its component parts and assigning them shorter depreciation lives and higher depreciation rates. This can result in higher deductions in the early years of ownership and increased cash flow. Cost segregation should be done with the help of a qualified tax professional in order to maximize the benefits.