Could a Cost Segregation Study Reduce Your Tax Bill?
Owning income-producing property can create valuable tax deductions, but many owners depreciate nearly the entire building over the standard recovery period without considering whether parts of the property may qualify for shorter depreciation lives through a cost segregation study.
A cost segregation study takes a closer look at the components of a building. Instead of treating the property as one large asset, the study identifies qualifying items that may be classified separately, such as certain electrical systems, flooring, landscaping, specialized plumbing, and site improvements.
The IRS recognizes cost segregation as a method of identifying property components for depreciation purposes, although studies must be properly prepared and supported.
Why does accelerated depreciation matter?
Depreciation allows a property owner to recover the cost of income-producing property through annual tax deductions. A cost segregation study may move some of those deductions into earlier years.
That does not necessarily increase the property’s total lifetime depreciation. Instead, it can change when deductions become available.
Receiving deductions sooner may help an owner:
- Reduce current taxable income
- Preserve cash for improvements or acquisitions
- Offset income from a recently acquired property
- Improve the near-term return on an investment
When might a cost segregation study make sense?
Studies are most commonly considered when an owner:
- Purchases or constructs a commercial building
- Acquires a multifamily or substantial rental property
- Completes a major renovation
- Has owned a qualifying property for several years but never performed a study
- Expects enough taxable income to benefit from accelerated deductions
A study may be less beneficial when the building has a relatively low depreciable basis, the property will be sold soon, or the owner cannot currently use the resulting deductions.
Look beyond the estimated deduction
A cost segregation decision should account for more than the first-year tax benefit. Property basis, depreciation recapture, passive-activity limitations, ownership plans, and the quality of the supporting study all matter.
The best time to evaluate is usually before filing the return for the year of acquisition or renovation, although opportunities may also exist for properties placed in service during earlier years.
Get a property-specific cost segregation assessment
Mercaldi Accounting helps rental and commercial property owners evaluate depreciation opportunities and determine whether a cost segregation study fits their broader tax strategy.
Considering a recent purchase or renovation? Book a call to review the property and potential next steps.