How Cost Segregation Can Save You Money on Income Tax

by Stacy Sherman of Cost Segregation Services LLC

Have you bought or renovated a commercial property in the last 25 years? If so, you may be missing out on income tax savings from cost segregation. This became tax law in 1997 and, despite being around for 25 years, these reductions are completely underused by the average building owner! If you just assume that your accountant takes care of everything and notifies you of every tax benefit, then you may be missing out on cost segregation.

Depreciation: Straight-Line vs. Cost Segregation

You may know that you get depreciation expense to offset your income tax. However, there are two ways to depreciate your building or tenant improvements. If you have not hired a firm to do a cost segregation study, then you are most likely doing “straight-line depreciation.” This means your losses are spread out evenly over 39 years. With an engineering-based cost segregation study, you will still depreciate your building over 39 years, but you can take up to 50% of those losses in the first year or early years. More losses mean income tax savings to you. On average, the savings is $60-80K per $1M in building cost.

Additional Savings: Partial Asset Disposition

If you renovated a property that you placed in service in a prior year, then you have additional savings called Partial Asset Disposition. That means there is “Cash in the Trash” and if you don’t take this in the year you replaced the “trash,” then you are also disposing of valuable tax savings. The “Cash in the Trash” savings is in addition to cost segregation savings!

Engaging a Third Party Firm

The average accounting firm does not offer these services since it’s a unique skill set. However, you can engage a third-party firm that specializes in engineering-based cost segregation studies. Most qualified engineering-based firms will provide a no-cost, no-obligation estimate of savings and fees and will work with your tax professional to deliver tax savings. Instead of replacing your primary tax provider, the third-party firm will collaborate, providing only the additional report necessary for your tax return.

Friends Don’t Let Friends Overpay Taxes! Make sure to share this with your building owner friends or friends who renovated their tenant spaces.

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