Cost segregation study to help commercial property owners maximize cash flow
Written by suleman
A tried and proven tax strategy for real estate investors CALIFORNIA - Investing in a commercial property or apartment building has been a great wealth building strategy for numerous investors and business owners. Not only is it a relatively safe investment, that can often yield a positive cash flow, but it also opens the door to many tax benefits. CPAs have been recommending strategies like the 1031 exchange for years. Another strategy that has been gaining popularity amongst savvy investors is called a cost segregation study
Cost segregation is an engineering-based study that involves identifying and assigning a value to all the sub-components of a building like the electrical wiring, flooring, specialty plumbing and many more. Once identified and documented in a cost segregation report, IRS rules allows various components to be reclassified out of the standard 39 year depreciation schedule for commercial buildings (or 27.5 years for apartment buildings) into a shorter depreciation period of 5 years, 7 years, or 15 years. There are multiple benefits one can expect from this method. The most prominent is the immediate increase in cash flow based on the deferral of taxes. In addition, identifying the value of various components will allow building owners to write off components in the future when a particular asset (ex. roof) is replaced. There are many other inherent benefits to using this method too which homeowners can realize once they begin to understand how the cost segregation study works.
The important thing to note here is that since the IRS recommends an engineering-based approach to properly document and justify the accelerated depreciation, the process will require a cost segregation specialist. Property owners or CPA firms seeking to have a cost segregation study completed for their clients must seek out a cost segregation specialist with a background in engineering or construction management. In addition, it would be prudent to ensure that the firm completing the cost segregation study will also include audit defense as part of their service in case of any IRS scrutiny.
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