What is Cost Segregation?
Cost Segregation is an engineering-based, tax savings tool to help companies that have acquired, renovated, constructed, or expanded real estate to reduce current income tax liabilities by accelerating depreciation deductions for qualifying components.
This is tax strategy that should be considered by nearly every taxpayer who owns, is constructing, renovating or acquiring real estate. By using an engineering- based approach to identify assets within a building that can be reclassified into much shorter depreciation recovery periods than the building itself, significant tax savings can be achieved.
Generally, an entire building would be classified with a straight-line depreciation cycle of either 39 years for commercial and industrial property or 27.5 years for residential-rental property. By applying a cost segregation study, you can maximize your inherent tax benefits by identifying, classifying, and segregating the personal property components of the building. This results in accelerated depreciable lives of 5, 7 and 15 years, thus saving thousands of tax dollars.
For example: For a new purchase placed into service the same year, $2,000,000 was reclassed to a 7-year life. In the first year alone that garnered a tax savings of $103,192. Over a 5-year period the one-time cost segregation study saved the owner over $525,000.