Business

The benefits of cost segregation

A cost segregation study can be very beneficial to you and your wallet. These types of studios are advantageous because they can help you significantly increase your cash flow by segregating the costs of multiple properties. The two main benefits of cost segregation are tax reduction and tax deferral. Cost segregation studies can also result in more accurate accounting and more accurate tracking of cost base and depreciation.

With cost segregation, more income will be taxed at the capital gains rate compared to the typical income rate. Therefore, the study can produce tax deductions that can substantially reduce the federal income taxes you owe on your property. Additionally, cost segregation identifies property assets and reclassifies costs allocated to personal property. Personal property can depreciate between 5 and 15 years, which can result in tax deferrals.

Cost segregation studies divide property into four fundamental groups: personal property, land improvements, land, and buildings. The category of property through which you will obtain the greatest tax benefits is personal property. Personal property includes items such as fixtures, furniture, and equipment. Because these types of items have a shorter useful life than other types of assets, depreciation occurs between 5 and 7 years.

The double declining balance accelerated depreciation method is used to determine the depreciation of personal property. This method assumes that the personal property in question will lose most of its value during the first few years of its useful life. To calculate the depreciation of personal property using the double declining balance method, the most current book value of the property and the years of usefulness of the property will be used.

Land improvement is another property category from which significant tax benefits can be derived through cost segregation. Using the 150 percent declining balance method, property such as fences and landscaping will be depreciated over a 15-year period. With this depreciation method, 150 percent of the straight-line APR will be used to determine depreciation. This simply means that the difference between the cost of the land improvement and the expected salvage value of the land improvement over 15 years will be divided to arrive at the depreciated value of the property.

There may be some benefits to building cost segregation whether the building is residential or non-residential. This can be especially true if construction costs are broken down into components. Most building structures will have a life expectancy of between 27.5 and 39 years. Therefore, you can benefit from segregation of components that do not have as long a useful life. For example, a home’s roof may need to be replaced within 10 years, which is much less than the expected life of the overall building structure. Segregating these costs could be beneficial. Land is the only property that cannot be depreciated.

If you are considering using cost segregation techniques to reduce or defer taxes on your properties, it is recommended that you contact a CPA. A study like this should be done by a professional with experience in tax benefits, accelerated depreciation deductions, and write-offs.

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