The U.S. commercial real estate industry is one of the largest globally, carrying a net worth of over $16 trillion. Its remarkable performance and improvement during the COVID-19 outbreak have encouraged investors to enter this market with a focus on maximizing their return on investment.
Cost segregation is one such tool that maximizes your return and saves you from a heavy tax burden.
If you have little understanding of cost segregation, here’s a comprehensive guide on cost segregation and its importance for your real estate business.
What’s Cost Segregation?
The identification, assessment, and analysis of any kind of real estate property (purchased, constructed, remodeled, or expanded) under the federal tax law and its eligibility check for accelerated depreciation is called a cost segregation study.
It’s a strategic tax planning tool, which allows individuals and companies to lower their income tax burden and increase their cash flows.
How’s It Performed?
Generally, when a commercial property is purchased, its useful life is 39.5 years under the straight-line method.
However, various components of a property may not last for straight 39.5 years. Therefore, a cost segregation study classifies a property into the following components:
- Personal Property
- Land Improvement
The property’s useful life reduces to at least 15 years after the cost segregation application, while personal properties can be as low as 5-7 years.
Why Is Cost Segregation Significant?
Real estate businesses solely deal in properties and long-term assets. That’s why cost segregation offers them several benefits.
When a cost segregation study reduces assets’ useful life under accelerated depreciation, it allows a company to avail maximum deductions permitted under the federal tax law. These deductions are in the form of depreciation expense, which increases the cash flows. The whole process helps real estate businesses defer and reduce federal taxes. It also writes-off building components that need repair or replacement.
Savings from federal taxes encourages real estate businesses to invest in lucrative projects and use the earnings for business expansion in the future.
However, for a successful cost segregation application, the assumptions and reports made for the long-term assets should be realistic. People shouldn’t worry about the increment in their expenses as depreciation is a non-cash expense and has no impact on your business’s real money/investment.
Who Performs Cost Segregation for Businesses?
There are cost segregation consultants who advise and file documents for a business. They help companies reclassify the assets for depreciation purposes and suggest methods to increase cash flows.
If you’re looking to hire cost segregation experts in the U.S., The Darson Group can help. Our consultants ensure that your company gets the tax credits it’s eligible for to enhance its stake in the market.