Cost segregation is well-known for providing significant tax savings on newly acquired or constructed properties, but is it still valuable if you’ve owned your property for a while? The answer is a resounding yes. Cost segregation can benefit both newly purchased and longstanding properties alike, often providing valuable deductions even years after the initial purchase. Here’s why cost segregation isn’t just for new properties and how it can offer substantial tax benefits for properties you’ve owned for years.
What is Cost Segregation? (Quick Recap)
Cost segregation is a tax strategy that allows property owners to accelerate the depreciation on certain assets within a property. By reclassifying specific components—such as lighting, flooring, and landscaping—into shorter depreciation categories, property owners can reduce taxable income and increase cash flow.
Typically, cost segregation is thought of as a strategy for new acquisitions or recently constructed properties, but it can also yield considerable benefits for properties that have been owned for years.
Cost Segregation for Longstanding Properties: How Does It Work?
If you’ve owned your property for several years, you can still take advantage of cost segregation through what’s called a “look-back study.” A look-back study allows property owners to perform a cost segregation analysis on an existing property and “catch up” on missed depreciation deductions from previous years. The result? An immediate boost in tax savings without needing to amend prior tax returns.
How a Look-Back Study Works:
- Reclassification of Assets: The cost segregation study reclassifies qualifying components into shorter depreciation schedules, similar to what would have been done in the year of acquisition.
- Immediate Deductions: The IRS allows property owners to catch up on the accelerated depreciation all at once, resulting in substantial deductions in the current tax year.
- No Need to Amend Returns: The catch-up process can be done without going back to amend previous returns, making it a straightforward way to gain tax benefits on a longstanding property.
This approach allows you to unlock significant tax savings, even if your property has been generating income for years.
Who Benefits Most from Cost Segregation on Older Properties?
A look-back cost segregation study can be particularly valuable for:
- Owners of Income-Generating Properties: If you own commercial buildings, residential rental properties, or mixed-use spaces, a look-back study can provide an immediate cash flow boost.
- Property Owners with Recent Renovations: If you’ve recently renovated or upgraded an existing property, cost segregation can help accelerate deductions on the new additions, further increasing your tax savings.
- Long-Term Holders Seeking Cash Flow: Property owners who plan to hold onto their property for several more years can benefit from the catch-up deductions without needing to make any changes to their tax returns.
Benefits of Cost Segregation on Longstanding Properties
- Immediate Cash Flow Increase With a look-back study, you’re essentially compressing years’ worth of depreciation deductions into the current tax year. This immediate cash flow increase can be reinvested into property improvements, used to fund new investments, or set aside for other business needs.
- Maximizing Tax Efficiency Without Amendments One of the major advantages of a look-back study is that it doesn’t require you to amend previous tax returns. Instead, you can apply the catch-up depreciation to your current tax return, simplifying the process and reducing administrative hassle.
- Tax Savings on Property Improvements If you’ve made upgrades to a property—such as installing new lighting, adding landscaping, or replacing fixtures—a cost segregation study can reclassify these improvements for faster depreciation. This allows you to maximize deductions on both the original property and any enhancements.
Examples of Longstanding Properties that Benefit from Cost Segregation
Even if a property isn’t newly acquired or constructed, it can still benefit from cost segregation in many scenarios. Here are a few examples:
- A 10-Year-Old Apartment Building: The owner of an apartment complex acquired 10 years ago could conduct a look-back study to identify qualifying assets and receive substantial depreciation deductions immediately, providing a financial boost in the current year.
- A Renovated Office Building: A commercial office building that underwent renovations five years ago can use cost segregation to accelerate deductions on the new improvements, from upgraded fixtures to HVAC systems.
- A Retail Space with Recent Upgrades: The owner of a retail property who added new signage, lighting, and flooring over the years can reclassify these assets for faster depreciation, lowering taxable income and increasing cash flow.
In each of these cases, cost segregation provides significant tax savings, regardless of how long the property has been owned.
Is Cost Segregation Right for Your Longstanding Property?
Cost segregation can be beneficial whether you’re acquiring a new property, building one from scratch, or maximizing the potential of an existing asset. If you’ve owned a property for several years and haven’t taken advantage of cost segregation, a look-back study can help you capture missed deductions and improve your tax efficiency.
Here are some questions to consider:
- Have you made improvements to the property? If so, a cost segregation study can apply accelerated depreciation to these upgrades.
- Are you looking to increase cash flow? Cost segregation provides immediate deductions, which can boost cash flow.
- Do you have high taxable income? Accelerated depreciation through cost segregation can reduce your taxable income and lower your tax liability in the current year.
The Bottom Line: Cost Segregation is Valuable for New and Longstanding Properties Alike
While cost segregation is commonly used on newly acquired or constructed properties, it can be just as valuable for longstanding properties. Through a look-back study, property owners can accelerate depreciation on qualifying assets and capture years of missed deductions, all without amending prior tax returns.
Interested in seeing if cost segregation is right for your property? Contact USTAGI today to discuss how a cost segregation study can unlock tax savings and improve your cash flow—whether your property is brand new or one you’ve owned for years.
