The Federal Tax Code underwent a few changes in 2017, which introduced alterations for taxpayers that have been covered extensively by the media.
The lower rates of certain “pass-through” entities, the corporate tax, and a decrease in individual tax brackets have been the talk of the town. However, the one thing that hasn’t received enough attention is the opportunity for additional tax savings through cost segregation.
Let’s take a look at what cost segregation is and how the tax reform affects it.
What’s Cost Segregation?
It’s a strategic planning tool used by commercial real estate investors and owners to improve their tax positions. They assess an entity’s real property assets and identify a portion of those costs that can be treated as personal property.
The segregation between personal property from the real estate itself reassigns the cost that would depreciate over a 39-year period to asset groups that will depreciate at a quicker rate. The taxpayer reduces the tax burden on himself in the early years of his investment by accelerating the depreciation deductions through cost segregation.
But cost segregation studies have been around for a while, what makes them so relevant now in light of the new tax reforms? Let’s have a look.
Tax Reform And The New Benefits Of Cost Segregation
The Bonus Depreciation
The bonus depreciation allows a taxpayer to write off a portion of an eligible asset in the year it is acquired. Initially, bonus depreciation was primarily limited to new property or assets with a life of less than 20 years.
After the tax reform, the bonus depreciation for assets acquired after 27th September 2017 increased to 100 percent. In addition to that, bonus depreciation eligibility was extended to used property.
This means that a cost segregation study on property acquired after the tax reforms are substantially more valuable. The value is even higher for used property.
Benefits To Renovated Properties
A cost segregation study will also benefit renovated property owners because the tax reforms removed three property classifications—qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.
It replaced these classifications with an asset group called qualified improvement property. While this group includes the same types of 15-year assets as the other three groups, it now also includes certain non-structural improvement assets.
As such, building improvements such as plumbing and alarm systems will be treated as 15-year assets. Renovators can use a cost segregation study to identify which assets don’t fall in the category of qualified improvement property to depreciate those over 3, 5, or 7 year periods and qualify for bonus depreciation.
If you want to find out more about cost segregation depreciation, get in touch with our cost segregation company.