Four Reasons to Consider a Cost Segregation Study

3 Minute Read
Posted by Randy Eickhoff on Jan 6, 2024 3:09:00 AM

Owning a commercial property requires constantly managing costs and increasing cash flow to maximize overall return on investment. Most building owners and landlords scrutinize expenses and operational expenditures to run their property as lean as possible. However, many overlook the potential advantages offered from a cost segregation study, a tax incentive designed specifically for commercial real estate owners to minimize tax burden and maximize cash flow.

Why Cost Segregation? What You Should Know

Cost Segregation allows individuals and companies with qualifying real estate expenditures to accelerate depreciation deductions. Commercial property owners following a traditional depreciation schedule often adhere to a standardized rate that typically ranges from 27.5-39 years based on the property type and usage. However, many interior and exterior components qualify as personal property with a faster write-off period than the building structure.

Enter the Cost Segregation Study.

A Cost Segregation Study methodically examines every building component to assign a relevant class life. A Cost Segregation Study goes beyond a holistic view of commercial land and buildings, identifying each particular asset and determining which, if any, qualify as personal property that depreciates at five-, seven-, and fifteen-year rates. At the conclusion of a Cost Segregation Study, the taxpayer will have a thorough analysis and separation of corporate and personal property and can assign a specific depreciation rate.

The Tax Benefits of Cost Segregation Studies

Conducting a Cost Segregation Study yields several significant benefits to taxpayers. A professional analysis can help:

Reduce Tax Liability

Accelerating annual depreciation directly impacts the total taxable income associated with the property. A cost segregation analysis can instantly lower tax liabilities for each year the benefit is leveraged.

Specifically in real estate: land improvements, specific additions to a building's core structure, and personal property may then be written off in 5, 7, or 15 years. It is possible, therefore, to reduce or eliminate income tax liability by accelerating depreciation through the Cost Segregation study.

Increase Cash Flow

Expediting the depreciation rate allows taxpayers to maximize deductions, and defer both state and federal income taxes. Optimizing deductions can generate an immediate and significant upswing in overall cash flow, and improve total shareholder value.

Cost segregation is one of the many ways commercial real estate investors can capitalize on the benefits of this lucrative asset class.

Increase Write-Offs

Segregating a property's significant assets and improvements also increases the opportunity for future write-offs. You'll have the ability to write-off each asset as it's replaced or renovated for further tax savings in subsequent years.

IRS Compliance

Most importantly, a professionally conducted Cost Segregation Study ensures you won't miss out on tax-saving opportunities and ensures that every deduction you claim is entirely compliant with federal and state legislation. Additionally, in the event of an audit, your Cost Segregation analysis will provide independent third-party documentation that meets every IRS requirement.

Do You Qualify for Cost Segregation Tax Deductions?

The best way to determine if your commercial property is eligible for a Cost Segregation analysis is to partner with a tax accounting firm specializing in this specific study process. A professional, reputable, and experienced tax team will systematically review your property to separate commercial and personal assets, creating relevant analysis and documentation that minimizes taxable income while optimizing overall cash flow benefits.

Contact Acena Consulting today to get a high-quality cost segregation study or hear more about the many benefits offered through cost segregation and analysis from one of our on-site accounting experts.

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Randy Eickhoff

Randy Eickhoff

Acena Consulting President Randy Eickhoff, licensed CPA, has partnered with more than 200 companies during more than 20 years of experience securing tax credits and other government incentives. His corporate partners range from multinational technology firms to smaller, privately held manufacturing, sports, and technology enterprises.