Commercial Property Owners – Tax Benefits of Cost Segregation

March 19, 2014 by Stephanie Potash

Are you a commercial property owner who wants to collect depreciation deductions sooner?  Normally, as a commercial property owner, you  depreciate the building over 39 years.  So every year, you deduct 1/39th of the property’s value (excluding land) from your taxes.  A Cost Segregation Study which is the process of identifying personal property assets that are grouped with real property assets, and separating out personal assets for tax reporting purposes, may help accelerate the deductions you can claim as well as your current year’s tax bill.

By conducting a “cost segregation study,”  you can dramatically speed up the depreciation process.  The study identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income tax obligations. The primary goal of a cost segregation study is to identify all construction related costs that can be depreciated over a shorter tax life (typically five, seven and 15 years) than the building (39 years for non-residential real property).

Here are 4 ways commercial property owners can benefit from doing a Cost Segregation Study:

1. Maximizing tax savings by adjusting the timing of deductions. When an asset’s life is shortened, depreciation expense is accelerated and tax payments are decreased during the early stages of a property’s life. This, in turn, releases cash for investment opportunities or current operating needs.
2. Creating an audit trail. Improper documentation of cost and asset classifications can lead to an unfavorable audit adjustment. A properly documented cost segregation helps resolve IRS inquiries at the earliest stages.
3. Playing Catch-Up: Retroactivity. Since 1996, taxpayers can capture immediate retroactive savings on property added since 1987. Previous rules, which provided a four-year catch-up period for retroactive savings, have been amended to allow taxpayers to take the entire amount of the adjustment in the year the cost segregation is completed. This opportunity to recapture unrecognized depreciation in one year presents an opportunity to perform retroactive cost segregation analyses on older properties to increase cash flow in the current year.
4. Additional tax benefits. Cost segregation can also reveal opportunities to reduce real estate tax liabilities and identify certain sales and use tax savings opportunities.

Our firm can help.  Contact us to find out if your building qualifies for this tax break.  With a cost segregation study, you can improve cash flow by reducing your tax bill the very next time you file a return!