How cost segregation helps in tax reduction?
Real Estate industries are the most booming industries in the current era. Many of the investors are maximizing their returns or make their income flow with their commercial real estate projects. Projects like these often include buying property, remodeling, expanding, or constructing.
What is Cost Segregation?
Cost Segregation is a commonly used tax planning method that allows Organizations and individuals who have constructed, purchased, expanded, or remodeled any kind of real estate buildings, to get a reduction on their taxable income by having a cost segregation study or segregation analysis on the property.
What are the benefits of Cost Segregation?
Many business owners are surprised to learn of the compelling tax savings by cost segregation study. Here the list of three most prominent benefits.
- Cash Flow:
Generates immediate increase in cash flow through accelerated depreciation tax deduction.
- Write Off:
Quantifies property’s major components and leasehold improvements so you can be written off when replaced or renovated.
- Review:
It provides an independent third-party analysis that will withstand of IRS review.
What is a cost segregation study?
A cost segregation study is the process of identifying and segregating the certain components of the property as personal property (Section 1245 Property) that are separated and distinct from the real property (Section 1250 Property) will make any accelerated depreciation benefits for income tax purposes. Personal property assets comprise an exterior land improvement, building's non-structural elements, and indirect construction costs.
The main goal of a cost segregation study is about finding all property-related costs that can be depreciated over 5, 7, and 15 years. Like, some of the electrical outlets such as appliances or computers should be depreciated over 5 years.
"The preparation of cost segregation studies requires knowledge on both construction process and tax law to involving property classification for depreciation process"
O'Connor goes beyond a traditional cost segregation study and we also highlight all the different building structural components (such as the roof, windows, or HVAC units) so when they are replaced, a loss deduction can be claimed. For leased property, we can also mention on tenant leasehold improvements.
How a cost segregation study works?
A cost segregation study should be completed by a professional and the study will separate certain qualified items that would normally be considered 1250 property.
This could include,
- The electrical system.
- Specialized kitchen equipment.
- Carpeting.
- Wall coverings.
- Partitions.
- Millwork.
- A concrete slab floors
- The ventilation system.
- Special plumbing.
- Lighting fixtures.
- The phone system.
- The computer system.
- Process piping.
- Storage tanks.
How a cost segregation study works?
A cost segregation study should be completed by a professional and the
Who qualifies for a cost segregation study?
Cost segregation studies will not suit everyone, it’s only applicable for commercial real estate investors or rental property owners with significant real estate activity that would benefit from a notable reduction in their federal income tax rate.
The Bottom line:
The cost segregation studies and the examination steps will facilitate the audit process and minimize the burden on taxpayers, practitioners and service examiners alike.
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