Cost segregation is a tax strategy used by real estate owners and investors to reallocate property costs from real property (such as land and building structure) to personal property (such as furniture, fixtures, and equipment) in order to take advantage of shorter depreciation periods and lower tax liability. Here’s how cost segregation can help lower taxes:
- Shorter Depreciation Periods: Personal property has a shorter depreciation period than real property, typically 5 to 7 years, compared to 27.5 to 39 years for residential properties and 39 years for commercial properties. This means that real estate owners and investors can take larger depreciation deductions in the earlier years of property ownership.
- Increased Depreciation Deductions: By reallocating a portion of real property costs to personal property, real estate owners and investors can take larger depreciation deductions each year, reducing their taxable income and thus lowering their tax liability.
- Improved Cash Flow: By taking larger depreciation deductions, real estate owners and investors can improve their cash flow and use the savings to invest in additional properties or improve existing properties.
- Deferral of Taxes: In some cases, cost segregation can also be used to defer taxes by spreading out the depreciation deductions over a longer period of time.
It’s important to note that cost segregation is a complex tax strategy that should only be performed by experienced professionals who have a deep understanding of tax laws and regulations. Additionally, it’s important to consult with a tax advisor to ensure that cost segregation is the right strategy for your specific real estate business or investment and to ensure that the cost segregation study meets all applicable tax requirements.