is Cost Segregation?
Your building, no matter what type of commercial property you own, is a mixed bag of thousands of components that can be activated into short life assets. Cost Segregation is an analysis and dissection of your property to identify the granular building components and organize them by their proper taxable lives.
Why Cost Segregation?
Cost Segregation study is one of the most effective ways to reduce tax liability and increase cash flow. Without a Cost Segregation study, your building is a single line asset that drip feeds you a depreciation expense at 2.56% (3.36% for apartments) of the building cost per year. But with a Cost Segregation study you can depreciate, on average, 32% of your building within the first year of ownership.
How Does Cost Segregation Work?
From a Fixed Asset perspective, Cost Segregation takes your building's single line item cost and typically transforms it into three different line items. For example:
Let's say you have "Building 1" with a cost of $1 million on the Fixed Asset Schedule depreciating over 39 years:
• Asset 1 - Building 1 1250 Building - 39 Year - $1,000,000
Without doing anything, this option gives you a depreciation deduction of $25,640 per year for 39 years.
Cost Segregation transforms that one line item into three:
• Asset 1 - Building 1 1245 Property - 5 year - $250,000
• Asset 2 - Building 1 1250 Site - 15 Year - $200,000
• Asset 3 - Building 1 1250 Building - 39 Year - $550,000
This option gives you an average depreciation deduction of $69,230 over the first six years of ownership. This equates to a benefit of $105,761. Simply put, without a cost seg study, you would forfeit that benefit.
A Gift from the IRS
Cost Segregation is a gift from the IRS.
But they don't give it to you automatically.
You have to seek it out.
And it has to be performed by qualified professionals who produce high quality studies.