How Does A Cost Segregation Study Work?
The key to taking advantage of cost segregation is to first order a cost segregation study. These studies can show you how to maximize the tax deductions from your investment property.
It’s best to hire a financial firm that can prove it has expertise in engineering, construction, tax law and accounting when creating a cost segregation study.
It’s important to note that taxpayers can perform a cost segregation only one time on any investment property that they own.
1. Complete A Feasibility Analysis
The first step your cost segregation team will take will be to analyze your investment property to make sure it is a good candidate for the process.
This requires your team to study the different components of your investment property, including its:
- Plumbing fixtures
- Roofing
- Electrical systems
- Sidewalks
- Driveway
- Flooring
- Other materials
Why? If you bought these items separately, you would be allowed under the IRS tax code to depreciate them over 5 to 15 years. But if these items were instead already part of a building that you purchased, you are only allowed to depreciate them over 27.5 years if you purchased a residential building or 39 years if you bought a commercial property.
In a cost segregation study, your team of engineering and financial experts will separate each part of your investment property and place them in their own categories. You can then benefit from accelerated depreciation deductions for some of these building features.
2. Gather All Necessary Information
The experts performing your property’s cost segregation study will typically need several documents to determine the value of your building and its systems. This could include a recent appraisal of the property, inspection reports or the closing documents you signed when buying your investment real estate.
3. Analyze The Property
Next, your team members will identify any operating costs of your investment property that you can depreciate over either 5, 7 or 15 years. Your team members will do this by studying any documents that you can provide them, such as blueprints, property records and inspection reports.
4. Complete A Report
Once your team members have analyzed the property, they'll prepare a report that you can use to determine how much you can save on your income taxes by using cost segregation strategies.
