The Cost Segregation study is an guide for property owners that own commercial property. It tells you what you can depreciate, when you can depreciate it, and it can be submitted to the IRS as support for your depreciation schedule that is submitted with your tax returns.
As the property owner, you will be able to claim standard depreciation which is going to be spread out over 39 years by default. Depending on the time of year that you purchase your property, your deductions may be limited to a portion of the depreciation for a single year which leaves little tax benefits to you as the owner. You can collect Bonus Depreciation, also known as Accelerated Depreciation if the assets qualify based on the current IRS tax codes. Current regulations limit qualifying assets to those with a depreciation of 20 years or less.
Lets talk about how you can gain control over the depreciation and utilize the Cost Segregation Study to reduce your tax liability.
About The Editor: Jason Trindade is a licensed Business Broker in the State of Nevada, Commercial Real Estate Broker, and a member of the American Society of Cost Segregation Professionals
The land will not qualify for any depreciation because there is no depreciation on the actual dirt.
The structure is an asset that is depreciated using the straight line method and it does not meet the requirements for accelerated depreciation.
The structure is an asset that is depreciated using the straight line method and it does not meet the requirements for accelerated depreciation.
Just about anything that you do to a piece of land is an improvement. Improvements that help the land serve other purposes can be depreciated over 15 years instead of 39 which means they qualify for accelerated depreciation. The land doesn't need those improvements, but buildings erected on it do, so they're depreciable to the extent that they support building. Good examples include parking lots, side walks, swimming pools. They are for the buildings, not the land.
A lot of the finishes on a property have a useful life of 5 years and they can be depreciated accordingly. This includes carpets, outlets, baseboards, appliances, fire extinguishers, and more. Unfortunately, if you upgrade the carpet and install tile floors, they are going to become part of the structure and they wont qualify for the bonus depreciation of this asset class.
Just about anything that you do to a piece of land is an improvement. Improvements that help the land serve other purposes can be depreciated over 15 years instead of 39 which means they qualify for accelerated depreciation. The land doesn't need those improvements, but buildings erected on it do, so they're depreciable to the extent that they support building. Good examples include parking lots, side walks, swimming pools. They are for the buildings, not the land.
Believe it or not, any race horse, regardless of age when placed in service, is depreciable over a 3 year period. But unfortunately, we are yet to have a client who actually owns a race horse. We figured we would ass this one in here for entertainment purposes. There is a good chance that if you order a Cost Segregation Study with us, you will save enough money on your taxes to buy one of these horses.
We will utilize some averages to create a potential scenario that would mirror a real world investment. Lets assume we bought an apartment complex for $5,000,000. By default we would be depreciating that over 29 years. With a Cost Segregation Study, we find out the land is worth $1,000,000, the structure is worth $2,000,000 which is depreciated over 29 years, the 15 year assets are worth $1,500,000, and the 5 year assets are worth $500,000. So any class with a life under 20 years can be depreciated in year 1. This year the bonus depreciation dropped to 80% from 100%, so you would get a total depreciation of $1,600,000 + $68,965 ($2,000,000/29 Years) for the property. Then you multiply that by your ownership to get your share of the depreciation that will show up on the K-1. Then you multiply that by your Federal and State income tax percentage. If you are at 35% for your federal tax and have no state tax, it would look like this.
$1,668,965 * 20% ownership = $333,793 Passive Loss
$333,793 * 35% federal tax bracket = $116,827 Income Tax Savings
We offer a free initial consultation where we can discuss the process and discuss the benefits of the Cost Segregation Study for your particular situation.
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