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Cost Segregation

Know the Benefits of Cost Segregation

The main benefit that you should know about cost segregation is accelerated depreciation. For outsiders, that may not sound right. No one wants depreciation, especially when accelerated. But in this instance, we are talking about depreciation of income property for tax purposes. Now, tax and depreciation sound good together. 

You should know, you will save a lot of money when you employ cost segregation. It’s hard to give a number to it considering that these would refer to different numbers. What you save from cost segregation will largely depend on the total amount of the assets. 

This is probably the only time when we like to hear the word depreciation of the property. Depreciation refers to the reduction of the value of an asset. When you are selling a property, then depreciation isn’t too good as this means that you will be receiving a low amount. However, when it comes to tax, it also means that you will be taxed low for a depreciated property or asset. 

With cost segregation, you can depreciate assets even if they haven’t really decreased in value. 

In a cost segregation analysis, assets are divided into two categories: real property and personal property. The former is the permanent things like the building or foundation of the building. The latter refers to the opposite, things that can be removed from the real property. This could be cabinets or air conditioning units and the like. 

Depreciation years

Generally, real property will depreciate over 27.5 years. Personal properties depreciate in fewer years, between five and 15 years. When you do cost segregation analysis, you are basically adding more years to the depreciation. This way, the amount to be taxed will be lower. 

The money you saved from cost segregation will allow you to be able to invest into worthwhile things. 

Now, let’s talk about what happens when a person sells a property for more than the value that they were taxed on? What they can do is to have a depreciation recapture. This is the process of reporting the gains that should be taxed through a capital gains rate. 

Another way to equalize this is through the 1031 exchange, or the trade of one income property for another or more just to have the same value on both sides. 

However, this kind of deduction may only be available to people that the Internal Revenue Service recognizes as real estate professionals. 

Not to worry, though, as you can always get in touch with real estate professionals for this. Don’t forget to get in touch with a CPA, too. They are the ones who are experts in cost segregation study. It is only when you do things right that you can actually save substantial amount of money. 

It really helps to be informed. Even if you don’t know how to do cost segregation study, the fact that you know it exists, it will already help you out. Even if you have to hire a CPA and real estate professional to complete the process. Ignorance will not save you a cent!

How Can Cost Segregation Help Property Owners?

The COVID-19 pandemic has really become a thorn in business. Businesses from all over the world were ordered closed at the peak of the pandemic in order to curtail the spread of the virus. Some of those businesses were forced to permanently close because it was just hard to recover from it. The businesses that survived would have to adapt to the new normal.

Some businesses would need to renovate their establishments in order to cater to the new normal. In the case of restaurants, for example, people are encouraged to eat outside because of the findings that there is a higher risk of virus spread indoors. For most businesses, additional equipment may be purchased to boost online business method.

Cost segregation will really help out businesses save more money.

How does this work?

Properties will depreciate. However, a lot of the properties have a depreciation term of around 39 years. That means that your taxable items wouldn’t decrease until 39 years later. That’s what cost segregation is about. It will allow you to allocate costs at a lower depreciable life.

A property owner could depreciate some properties to just five years or seven or 15. The standard is from 27.5 to 39 years. Even reducing the depreciable life from 39 years to 27.5 could already reduce much of a person’s taxable income.

The process is called cost segregation study. In a business establishment, for example, there are various assets inside the building that can be greatly depreciated by years.

Here’s the best news for business owners: assets purchased from September 28, 2017 to December 31, 2022 have better standing in terms of property depreciation. In the mentioned five years, assets could be depreciated during the first year of ownership. Experts calculate tax savings to be between 33% and 66%.


There are some issues raised against cost segregation. One common misconception is that it doesn’t work on short-term assets. That’s actually a myth. The property an entrepreneur purchases doesn’t have an intrinsic value yet. It is only when it is used that the market value is added to it. Segregating the assets allows the entrepreneur to determine the values of each by knowing their depreciation lives.

Another misconception is that there is too much trouble doing the cost segregation study and the result is not that significant. That’s a terrible way of looking at it. It is a common process that people work hard to gain something. With cost segregation, it’s not even that hard, especially if you employ the right people to do the job.

The Internal Revenue Service audit technique guide implies that experience and expertise matter when it comes to cost segregation study. There are also various methodologies that can be employed in the study. Choosing the right one will help business owners maximize benefit.

Cost segregation is a proven tax strategy of accelerating depreciation results in order to reduce taxable income. The strategy will allow every business owner to increase their cash flow.

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