Cost Segregation
Cost segregation is a tax planning strategy that involves identifying and reclassifying certain assets in a commercial building as personal property or land improvements, rather than real property. The goal is to identify assets that have a shorter useful life, such as carpeting, lighting fixtures, or mechanical systems, and reclassify them as personal property or land improvements, which can be depreciated over a shorter period of time.
By doing so, the owner of the building can take accelerated depreciation deductions on these assets, which can reduce the amount of taxable income in the short term.
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Frequently asked questions
What are the benefits of cost segregation?

There are several benefits to using cost segregation. In addition to reducing taxable income in the short term, it can also increase cash flow and improve the overall return on investment for the building

Is cost segregation subject to review by the IRS?

Yes, cost segregation is subject to review by the Internal Revenue Service, and it is important to carefully document and analyze the assets being reclassified. As a result, it is important to work with a tax professional or other qualified adviser when considering this strategy.

Can cost segregation be used for residential properties?

Cost segregation is generally only used for commercial properties but it can be used for residential properties if they are owned as investments. It can not be used on residential properties that you live in as a full-time residence.

Is cost segregation only for new construction or acquisitions?

No, cost segregation can also be used for existing buildings that have undergone significant renovations or improvements. However, the rules for reclassifying assets in these cases may be different than for new construction or acquisitions.

How often do you need a cost segregation study?

A cost segregation study can be conducted once for every property a taxpayer constructs, purchases, or inherits. Yet, when substantial enhancements are made to the property following its activation, these improvements create openings for extra cost segregation studies and added depreciation deductions.

For instance, notable enhancements like building expansions or remodels offer opportunities for a fresh cost segregation examination.

In the scenario where a different taxpayer procures a property that underwent a prior cost segregation study, the IRS suggests initiating a new cost segregation study for the new owner. This is due to the distinct circumstances surrounding the property under its new ownership.