Cost Segregation Studies

The purpose of a cost segregation study is to identify assets and their costs related to a real estate purchase or reconstruction and classify those assets for federal tax purposes.

When taxpayers purchase or construct a building, it is typically depreciated. However, a cost segregation study identifies costs related to real property that can be reallocated to a short-life deprecation schedule. These studies are one of the most valuable tax-saving strategies available for commercial real estate owners, leaseholders, and others.

A cost segregation study can be performed at the time of property acquisition or construction and is typically implemented on the first tax return for the property. The IRS also allows taxpayers to perform a cost segregation study on a building placed in service during a prior year and “catch up” the additional depreciation amount without an amended tax return.

Benefits of a Cost Segregation Studies

In a typical cost segregation study, between 15% and 45% of a building’s costs can be reclassified to shorter-life assets, depending on the type of facility. For a $1 million project, this can equal between $30,000 and $90,000 in increased cash flow. This allows further investment or even quicker repayment of the loan on the building.

Many real estate investors, who already own, construct, renovate, or acquire property – especially property worth more than $1 million or improvements that cost more than $500,000 – can benefit from a cost segregation study.

If you are interested in learning more about cost segregation studies
and how one can benefit you, Smith Schafer wants to help!

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