The CRE industry is huge. There are different investment properties one can consider investing in. But it is multifamily properties in recent times which has proven to be the most secure and reliable option for investors. But when it comes to investing in a multifamily property, the investors want to take all the measures for increasing their returns and use it in the most diverse way.
To do this, they reduce the income tax liability by making use of cost segregation. It will massively speed up the rate at which the investors can actually claim the tax deduction benefits. Generally, the multifamily real estate IRS depreciation period can be about 7.5 years. On the other side, the other commercial real estate considers a depreciation period of about 39 years.
Now it is the cost segregation that allows investors to reduce the depreciation over 15 years period, which greatly can increase the cash flow. For instance, if an apartment building is worth around $1 million, then it can be depreciated over 15 years. Herein the investors would want to have a depreciation deduction of around $36300 every year.
When the depreciation is taken over successfully over a period of time, then an investor would be able to stag a $142000 annual depreciation deduction. It is quite unlikely that an entire building would be reclassified as a seven-year depreciating asset. Even a $100,000 tto$200,000 deduction can lead to a great tax saving in a year, but in order to take the benefit from the depreciation deductions over a period of time, the building owners must order a cost segregation study.
The guide here will provide your insight into cost segregation. It will help you understand how it can be used or what aspects one needs to be aware of when using it.
Cost segregation study- What does it mean?
It is a strategy used by the real estate investor, both active and passive, to reduce the tax payments by utilizing accelerated depreciation. As a building starts to age, the IRS allows the property owners to reduce a certain amount of money every year that can be applied before tax as a part of depreciation.
The cost segregation herein allows you to maximize the depreciation amount expenses, which is available by speeding up the property value decline. As an investor, the more you will claim in the depreciation, the better it will be for you to walk away from the taxes. The commercial real estate and multifamily properties got a depreciation period of about 17.5 years to 39 years.
As for the cost segregation study, the exterior and interior components of the property can greatly be identified and segregated as personal property, which can speed up the depreciation period significantly and increase the cash flow that investors will receive.
Benefits of cost segregation
The building owners can actually benefit a lot and save a lot on the tax liability due to the accelerated depreciation on the property with the immediate decrease in the final cost of the taxes. But it also transfers the temporary boost in the cash flow to the investors.
There are various reasons you need to go for cost segregation. Generally, the investors prefer accelerated depreciation because they might not hold the property for more than a few years. In such situations, it is essential to have the money on the table. When the borrowers go for appreciation deduction, it will happen when the depreciating assets like the personal property improvements and the timetable are there.
Alternatively, the coarse aggregate or depreciation can be beneficial when you are expected to replace the item before it actually depreciates entirely. So electronics can be a perfect example. The items which have shorter usable life presents a new opportunity for depreciation detection, but an essential thing one is it reduces tax burden, which will help you get a lot of money in your pocket, and the causal relation can greatly reduce the taxable income by hundreds of thousands of dollars.
Even the high-value properties are involved in the process. The money that is saved can immediately be put towards the next investment. But it is vital that you know that the tax code can sometimes change without any substantial notice. Thus this means that the opportunity that the cost segregation provides can go away at any time.
For that reason, most of the investors take all the available data sources immediately rather than saving them for the next taxable year. It is widely used because the investors would be able to get great benefits in every situation. For instance, some of the owners might be relying on a consistent depreciation deduction every year to reduce the tax burden.
If you have no plans to purchase expensive properties that will yield additional depreciation deductions, cost segregation might not be beneficial. So before you make use of cost segregation into accelerated depreciation, make sure you engage with the professional to create a study.
The study will provide you with a complete idea. There will be experts like lawyers, accountants, etc., involved in the process. It will help you maximize available profit deduction and serve as a safety net so that all the questions are answered and classified right at the beginning.
Also, you have a clear idea of what type of property you have and how you can save money on the results of the study. You need to take proper measures right on time to avoid any difficulty later and improve the chances of earning a high income over time.
Working of cost segregation studies
The IRS has got different timelines as to how long the building components will have a lifetime. The studies in real estate will help reclassify which IRS category is the one wherein the building components fall in. The investors now have the opportunity to accelerate the building component lifetime and speed of the expense amount. As the expense will continue to grow, you cannot set the taxes with the IRS break down the expenses into four categories which are.
- Land which is present under the property and cannot be expensed
- Renovation for the personal property like fixtures, flooring, furniture, etc. that can be for 5 to 7 years
- The exterior improvement renovations like fencing parking lot area can be expensed to over 15 years
- Finally, it is a building which can be expensed over 27.5 to 39 years. However, it depends entirely on the type of asset you have.
Performing cost segregation study
You must know that the cost segregation study is completed by the construction engineers, the tax professionals, etc. In most cases, it is an engineering firm that generally completes a cost segregation study.
It involves the physical inspection of the real estate properties and the classification of the other aspects of the building. It is only the experts who can handle the process well. In most cases, it will take about 45 to 60 days to complete the study and get the results.
When to consider cost segregation study?
In the year 2017, the tax cut and jobs Act added the provisions to the IRS code, which allows the business owners to have the eligibility to go for 100% bonus depreciation on a qualified property during the first year rather than overtime.
However, it is recommended that the cost segregation studies be completed within the first year of purchasing the asset for maximum tax benefits.
Is cost segregation, right?
Before you actually start considering your depreciation or the amount of money you can save with cost segregation, it is essential that you discuss things with the professionals to know if it will be right for you.
There are costs involved in conducting the study. Also, the net benefit will depend on the type of property owned and other considerations. Cost segregation has the potential to benefit any property, be it the owners of the commercial property or the multifamily will benefit the most from studies. So they must definitely consider getting the study done.
Conducting a cost segregation study can actually be highly beneficial for reducing tax liability. However, there are certain costs involved in the process, which one must understand and calculate well to get the tax benefits.
Besides, the result would depend entirely on the type of property you have. In case you are considering making use of the cost segregation for reducing the taxable income, then you need to consider contacting an expert to know if it is worth it.
When undertaken correctly, it might lead to savings for tens of thousands of dollars. But remember, not every investment is appropriate for cost segregation. To get professional assistance, you can consider contacting Private Capital Investors.
They have got expert professionals who will be there to guide you well. As the leading firm, they will work hard to guarantee you have a hassle-free experience. They will be able to guide you well and provide all the assistance you need to save money on the depreciation. For sure, with them, you will have the proper assurance of safety and reliability.