Cost Segregation is a strategic tax savings tool that allows companies and individuals, who have constructed, purchased, expanded, or remodeled any kind of real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes.
In general, it is easy to identify furniture, fixtures, and equipment (FF&E) that are depreciated over 5 or 7 years for tax purposes. However, a Cost Segregation Study goes far beyond that by dissecting construction costs that are usually depreciated over 27 ½ or 39 years. The primary goal of a Cost Segregation Study is to identify all construction-related costs that can be depreciated over 5, 7 and 15 years.
For example, 20% to 50% of the total electrical costs in most buildings can qualify as personal property (depreciated over 5 or 7 years). Reducing tax lives results in accelerated depreciation deductions, a reduced tax liability, and increased cash flow.
Walker Properties constructed a brand new office building in 2012.
The new building has 60,000 square feet and a lot size of 220,000 square feet.
Results: Year one deductions of over $400,000.
Year one increased cash flow of $170,000.
||What is involved in a Cost Segregation study?
A quality Cost Segregation Study evaluates all information including available records, inspections, and interviews, and presents the findings in a clear, well-documented format.
Our process for conducting a detailed Cost Segregation includes: A review of all cost detail for the property including but not limited to: the general contractor's application for payment, construction invoices, change orders, depreciation schedules, and appraisals.
||When should a Cost Segregation Study be conducted?
The ideal time for a Cost Segregation Study can vary depending on a client's tax situation.
At KBKG, our team of engineers and tax experts work together with clients and their accountants to recommend the best tax planning solution to fit their needs. A free preliminary analysis can help determine the right timing and strategy for any investor.
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- Post-purchase, Remodel, or Construction: "Look-back" Cost Segregation Study: A Cost Segregation Study can be completed anytime after the purchase, remodel, or construction of a property.
- Year Placed in Service: The optimum time for a Cost Segregation Study for new owners, is during the year a building is constructed, purchased, or remodeled.
- Pre-construction: For investors who are in the planning phases of construction or remodeling, the best time to consider a Cost Segregation Study is before the infrastructure of the building is set.
your estimated deduction benefit