Cost Segregation for Depreciate-Property Improvements. Since most commercial building owners are not depreciating their property as quickly as they need to, they are grossly overpaying federal income taxes. A cost segregation study allows property owners to both defer and reduce federal income taxation. When correctly performed by an appraiser with experience in cost segregation, this is a conservative tax preparation tool which reduces federal income taxes by properly allocating the cost basis involving land, 5-year, 7-year, 15-year, 27 ½ -year and 39-year property.
Advantages of a cost segregation study are substantial, immediate and enduring. Year 1 national income tax savings are generally at least two times the cost of a cost segregation study. Oftentimes they’re five to fifty times the price of this analysis. The current value of national income tax savings for a home held for ten decades are typically at least twice the cost of this study. In many cases, the current value of tax savings up to 30 to 50 times the total cost of the report. The cost segregation study is only needed once. Its price is not recurring, but the benefits are recurring throughout the expression of land ownership. A cost segregation study can additionally help reduce local property taxation by separating personal and real property for newly constructed properties.
A limited time commitment from the owner is required, perhaps 10 to 15 minutes, to prepare cost segregation. This restricted commitment of time results in substantial tax savings, which are equally conservative in approach and well documented. Some owners believe their accountant is correctly inserted elements into the proper classifications. Many accountants cannot thoroughly research this highly specialized area to comprehend the myriad of items that could be assessed and are accidentally overstating their customer’s income tax obligation. Furthermore, not getting a cost segregation study raises vulnerability in the event of an audit because there’s no clear audit trail. A cost segregation study prepared by an appraiser with experience in land valuation, building prices and market value clearly documents every one of these things. Further, a cost segregation specialist can most likely radically increase allowable depreciation.
If you own real estate and pay federal income taxes or expect to during the ownership period to your home, you will benefit from the outcomes of a cost segregation study. This is true if the possession to the property is titled in a corporation, limited partnership or limited liability corporation. For syndicators, a cost segregation study is suitable if limited partners will get material net taxable income during the holding period even if the general partner does not currently pay federal income taxes. The cost segregation study will boost depreciation defense, consequently decreasing and deferring federal income taxation for its investors.
Considering that a cost segregation study reduces and defers federal Income taxation, let us review the long-term effects of this deferral. However, capital gains tax prices are generally 20 percent – 25% for high net-worth individuals, while the average income tax rate is 35%. In addition, the deferral throughout the ownership period has substance benefits because of the time value of money. All investors would much rather pay a 20 percent – 25 percent tax rate when an asset is marketed as opposed to paying a 35% tax rate now.
When You Should Get a Cost Segregation Study
When you build or purchase a property is the best time to obtain a cost segregation study. Documentation is easily available for performing a research and a contemporaneous property review can be performed to best record results. However, there are options to perform a cost segregation study for land which has been developed or purchased previously.
Elements of Preparing a Cost Segregation Study
The appraiser starts by gathering documents from the property owner and performing a site visit. As necessary, based on the special-use property found during the site visit, the appraiser would confer with tax counsel and review relevant tax court decisions. For newly constructed properties, most of the costs detail can be obtained from building draws or statements from contractors. For existing properties, the company performs a number take-off for 5-year, 7-year, and 15-year land and estimates replacement price utilizing recognized sources. The company then values land, 5-year, seven- year, 15-year, 27.5-year and 39-year property based upon review, evaluation and IRS regulations and court rulings.
Does this only apply to big owners?
Both large and small owners of income land or commercial properties with a cost basis of at least $200,000 will likely observe a material benefit in excess of the cost from a cost segregation study. In fact, owners of single-family rental houses can likely achieve rewarding benefits by obtaining a cost segregation study.
Qualifications to consider when ordering a Cost Segregation Report
The ability to appreciate land and real property are crucial elements when engaging a tax loss expert to perform a price segregation study. Additionally, it is essential that they have a detailed comprehension of rules for classifying 5-year, 7-year, 15-year, 27.5-year and 39-year property. The ability to justifiably increase short-life depreciation materially increases classifications, few have a detailed understanding of this highly specialized niche. Make sure the report supplier has scrutinized both the federal income tax code and the tax court cases to allow you to optimize your depreciation and minimize your federal income tax liability.