What is cost segregation and how can it benefit my clients?
Most commercial property owners can benefit from a cost segregation study on their commercial property. Cost segregation is a tax strategy used by commercial property owners and investors to reclassify certain assets within a property as personal property, rather than real property. This allows for a faster depreciation schedule, resulting in a larger tax deduction in the short-term. The goal of cost segregation is to accelerate depreciation deductions and reduce the overall tax liability for the property owner. It is typically used for commercial and rental properties, and is usually conducted by a professional engineer or a cost segregation specialist.
When an accelerated depreciation schedule is implemented, typically, current taxable income will be greatly reduced and your client could realize a cash flow increase of $60,000 to $100,000 for every $1,000,000 of building cost in the first year. This is your money that your clients can use to pay down other debt or invest in additional income producing properties.
The Tax Cuts and Jobs Act (TCJA) now allows 100% bonus depreciation for all the personal property and land improvement property constructed or acquired between 9/27/17, and 12/31/2022. What this means is that all property classified as eligible for 5, 7, or 15 year depreciation can be written off in one year. This is equivalent to expensing these items.
In 2023, the bonus depreciation is reduced to 80% applied in the first year and the remaining 20% spread over 5, 7, or 15 years. Act now to take advantage of the bonus depreciation while it lasts.
The best time to conduct a cost segregation study is in the year the building is acquired, constructed or remodeled. However, you can have a look-back study done any time afterwards and claim the resulting write-offs without amending prior-year tax returns.