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.
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!