Cost Segregation Broken Down

by AJ Sabo on February 5, 2018 , Comments Off on Cost Segregation Broken Down

There’s no way to get out of paying taxes; it’s an inevitable part of life, like the disproportionate amount of red lights you always encounter when you’re running late.

But there is something you can do to lower your taxes this year: participate in a cost segregation study. Tax rules and regulations got you confused? We’re here to help! Read on, and learn all you need to know about this underused mega-break in property taxes.

What is cost segregation?

Cost segregation refers to the practice of identifying assets and their costs, and classifying those assets for federal tax purposes. In plain English, this means separating various building costs so that they can be taxed with an appropriate depreciable life.

In order to properly identify assets and their costs, a cost segregation study is performed. In this study, commercial building costs which were previously classified with a 39-year depreciable life can instead be classified as personal property or as land improvements, with a 5-, 7-, or 15-year depreciable life, significantly lowering their tax liability.

Benefits of a cost segregation study

Why bother with this extra step when you have enough on your head already maintaining your properties, complying with all relevant laws, and paying taxes?

The reason is simple: cost segregation results in an immediate increase in cash flow. Your tax liability will be reduced, keeping more of your money in your pocket. To make it even better, cost segregation laws allow you to reclaim depreciation deductions from previous years that you may have missed because you neglected to do a cost segregation study – all without having to amend your tax returns. It doesn’t get much better than that!

Can’t I just do the work on my own?

With a tax code that’s even more complicated than the NYC compliance code, having an official cost segregation study done on your properties and assets is crucial. And yes, even your accountant may not understand exactly how to apply the asset depreciation rules.

Here’s how it works: Cost segregation is based on the principle that “a dollar today is worth more than a dollar tomorrow.” The same logic carries over to the following statement: “A tax deduction today is worth more than a tax deduction tomorrow.”

Normally, an entire commercial building’s depreciation value will be set at 39 years, and a multi-family dwelling will have a depreciation value of 27.5 years.  But as you and anyone who’s ever been tasked with maintaining a building knows, most assets in your properties will not last that long. Some will last 5 years, some will make it to 7 years, while others will put in a full 15 years of service – but still won’t make it to 39 years. Therefore, these assets depreciate at an increased rate and deserve a lower tax liability.

An accountant, and most laymen, will lump every asset in a property together and keep it at the 39-year depreciation mark. If you’re smart, though, you’ll have a cost segregation study done to properly identify, separate and reclassify every component of your property to a shorter depreciable tax life, netting you a significant amount of tax savings.

So it is highly recommended that you don’t attempt this yourself but use a qualified professional.  Who is qualified? We can’t give away all our secrets at one time. Look out for our next blog where we will explore who is qualified to do a cost segregation study, when it is the best time to do one, which properties you should have it done for and what it costs.

Not interested in waiting? Contact a Jaffa representative today and find out how they can help you with cost segregation. Jaffa has expertly assisted real estate owners in identifying untapped sources of revenue for their properties for over a decade, and they can guide you through the cost segregation process and help you keep your money where it belongs, in your pockets.