COST SEGREGATION
When to Conduct A Study
Cost segregation is a tax strategy used by real estate owners to accelerate depreciation deductions and reduce current income tax liabilities. The conditions under which it is most beneficial to perform a cost segregation study include:
- Ownership of Real Property: You must own commercial or residential rental property, as cost segregation primarily applies to depreciable real estate.
- Recent Purchase or Construction: Properties recently acquired, constructed, or significantly renovated are prime candidates, as a cost segregation study can reclassify property components into shorter depreciation periods.
- A Personal Residence: Converted to a rental property is considered “placed in service” at the time of conversion to a rental property.
- Long-Term Hold: If you plan to hold the property for a long period, the benefits of accelerated depreciation can be fully realized over time.
- Significant Non-Structural Assets: Properties with significant non-structural components (like fixtures, equipment, landscaping, etc.) that can be classified into shorter-lived asset categories are ideal.
- Positive Cash Flow: Having positive cash flow from the property ensures that you can use the increased depreciation deductions.
- Qualified Improvement Property: Improvements made to the interior of nonresidential buildings can qualify for shorter depreciation periods and bonus depreciation.
- Potential for Bonus Depreciation: Properties eligible for 100% bonus depreciation can benefit greatly from a cost segregation study, allowing immediate expensing of certain costs.