Cost segregation is a powerful tax strategy that can save property owners thousands of dollars. But is it right for everyone? If you’re a real estate owner, investor, or professional managing properties, understanding whether you qualify for a cost segregation study could make a major impact on your bottom line. Here’s what you need to know about who should perform a cost segregation study and why.
What is a Cost Segregation Study? (Quick Recap)
A cost segregation study is a tax-saving tool that allows property owners to reclassify specific components of their property, accelerating depreciation and reducing taxable income in the early years of ownership. This IRS-approved strategy can result in substantial tax savings, but it’s particularly beneficial for certain types of properties and owners.
1. Owners of Commercial Properties
Owners of office buildings, retail spaces, warehouses, hotels, and other commercial properties are some of the top candidates for cost segregation studies. Commercial properties often have a wide variety of assets that qualify for shorter depreciation timelines, such as:
- HVAC systems
- Interior furnishings
- Flooring and fixtures
- Specialized lighting
This makes them ideal for cost segregation, allowing commercial property owners to see significant upfront tax savings and increased cash flow.
2. Residential Rental Property Owners
Residential rental properties, including apartment buildings, duplexes, and multi-family units, are also excellent candidates for cost segregation studies. By reclassifying assets like carpeting, appliances, and landscaping, residential property owners can enjoy immediate tax deductions, reducing their tax burden while increasing the profitability of their properties.
3. Newly Purchased or Constructed Properties
If you’ve recently purchased or built a property, performing a cost segregation study within the first year of ownership can maximize tax benefits right from the start. This is a common approach for investors looking to secure immediate tax relief to offset their initial investment.
4. Properties That Have Been Renovated or Improved
Renovations and property improvements can be costly, but they’re often eligible for accelerated depreciation through a cost segregation study. If you’ve upgraded your property—whether adding new equipment, renovating interiors, or enhancing landscaping—a cost segregation study can help you reclaim some of those costs through tax deductions.
5. Real Estate Professionals and Passive Investors
Active real estate professionals, such as investors and property managers, frequently perform cost segregation studies to maximize tax benefits for themselves or their clients. Passive investors may also benefit, especially those with multiple properties, as it allows them to create a more favorable cash flow position.
6. Those Planning a 1031 Exchange
A cost segregation study can also complement a 1031 exchange. After exchanging one property for another, a new cost segregation study can maximize deductions on the newly acquired property, creating an ongoing tax-saving strategy.
Who May Not Benefit from a Cost Segregation Study?
Cost segregation is a powerful tool, but it may not be beneficial for every property owner. Owners of smaller properties (usually under $200,000), those planning to sell in the near future, or owners without significant income to offset may find that the costs of a study outweigh the potential tax savings.
The Benefits of Performing a Cost Segregation Study
For those who qualify, cost segregation offers some unbeatable advantages:
- Increased Cash Flow: By reducing taxable income in the early years of ownership, cost segregation provides immediate cash flow, which can be reinvested in other properties or business ventures.
- Reduced Tax Liability: Accelerating depreciation results in lower tax bills, which can add up to substantial savings over time.
- Improved ROI on Property Investments: The tax savings generated by cost segregation improve the overall return on investment for qualifying properties.
How to Get Started with a Cost Segregation Study
If you think a cost segregation study might be right for you, consulting with a qualified cost segregation provider is the best next step. They can review your property, assess potential tax savings, and guide you through the process to ensure compliance with IRS regulations.
Ready to maximize your tax savings? Contact USTAGI today to find out how a cost segregation study can help you achieve greater financial benefits from your real estate investments.
