How to Maximize the Tax Benefits of Real Estate With Cost Segregation Studies
Newer real estate investors are often amazed to find out that their investments can get tax breaks through depreciation. But let's talk about another tactic that's not as widely known: cost segregation.
What is Cost Segregation?
Seasoned real estate investors understand that every penny poured into real estate can be maximized. It can be the difference between an okay investment and a great one.
So, what's cost segregation? It's a savvy strategy to fast-track tax benefits from your investment. Instead of waiting years for depreciation, you speed up the process by depreciating different parts of the property at varying rates.
Why bother speeding up depreciation? Well, here's the deal: rental income from real estate gets taxed differently from your regular job income. As a building ages, not just the structure, but even the stuff inside (yes, even the kitchen sink) can be depreciated. This means paying less tax on the income from your property.
How does cost segregation work? It's like this: normally, the IRS says residential property depreciates over 27.5 years, and commercial property over 39 years. But with cost segregation, you separate the building from its interior and exterior components, which often depreciate much faster.
Now, how's a cost segregation study done? A pro with expertise in engineering and taxes checks out every part of the property and puts them into tax-friendly categories. Things like heating systems, carpets, cabinets—you name it.
How Is a Cost Segregation Study Done?
A professional with experience in engineering and taxes does a study of each component of the property and categorizes them into their most tax-efficient categories. Things like:
Heating & cooling systems
Carpeting
Cabinets
Storage tanks
Millwork
Wallcoverings
Parking lots
Kitchen equipment
Electrical system
Plumbing
What's the payoff?
Well, a cost segregation study means faster depreciation and fewer taxes to pay.
Here's the kicker: all the bits and bobs of a building (apart from the building itself and the land) can be seen as stuff that wears out faster. While a whole building might take 27.5 or 39 years to depreciate, these items might do it in 5, 7, or 15 years. Sometimes, you can even write them off completely, which means more cash in your pocket.
Plus, a full cost segregation study also gives you a detailed report on structural stuff like the roof or heating systems, which you can claim deductions on when they're replaced.
When's the best time to do a cost segregation study? Anytime after buying a property, but it packs the most punch in the first year. Thanks to a law from 2017, you can deduct 100% of the value of certain assets in the first year, saving you a ton in taxes.
Who should consider a cost segregation study? Well, it's not cheap, often costing tens of thousands. So, it's usually folks with commercial real estate or apartment buildings who benefit the most.
Looking for even more tax benefits from real estate? Resilience Equity has got your back. We make it simple and stress-free to invest in deals that cut your taxes and give you passive income. Schedule a chat with one of our real estate advisors today.
