Cost Segregation
One of the great advantages of commercial property investing is the tax benefits. The IRS has a program that allows the owners of apartment buildings or any other commercial property to increase the level of accelerated depreciation allowed in a tax year.
The tax savings may go back to property acquired after 1986, and they apply to new or future construction. They also extend to existing buildings under renovation, expansion and leasehold improvements, as well as to property about to be acquired. It can also be used for financial accounting, insurance and property tax purposes. The primary goal of a cost segregation study is to identify all construction-related costs that qualify for accelerated income tax depreciation. Cost segregation is not a tax shelter and it is not tax evasion.
Ask Yourself These Questions To Determine if You and Your Property Qualify:
Do you own a commercial property valued at $500,000 or more?
Do you pay federal income taxes?
Do you operate a corporation or entity that is for-profit?
Are you planning to the hold the property for more than one year?
To Obtain the Benefits of Cost Segregation You Must Get a Study
Your cost segregation study will analyze the taxes and costs incurred to buy, construct or renovate any kind of commercial real estate. You will need to procure the services of an expert or CPA to conduct the study. The CPA will dissect the costs to determine the accelerated income tax schedules. In order to meet the minimum qualifications of a cost segregation study, property owners must be taxpayers or intend to pay taxes. The cost of a study can range between $10,000 and $100.000.00 depending on the size and complexity of the project.
Advantages of Cost Segregation
- Considerable return on investments property that do not need to be insured.
- Increased tax deductions for depreciation and reduces taxable income.
- Opportunity to correct misclassified assets and claim “catch-up” tax deductions.
- Ability to achieve faster building and acquisition cost write offs.
- Reduction in insurance costs by identifying the components of the property that do not need to be insured.
- Determine personal property versus real property for write off versus capitalization prior to construction. This allows you to write off these items opposed to capitalizing the assets. This can provide you with huge tax benefits.
- Defers taxes on capital gain amounts until the property is sold.
- Reduces real estate property taxes.
- Reduces federal income tax and increases depreciation.
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- Determining the Value of an Apartment Building Investment Using Cap Rates
- Finance Apartment Building Purchase with a Limited Partnership?
Article Author: Ted KarschTed has written 70 articles for us.
Visit Ted's Website: http://www.apartmentbuildinginvestor.com
Joshua Dorkin
{ 2 comments… read them below or add one }
Ted, good article — but I believe your statement “Do you own a commercial property valued at $500,000 or more?” was far too limiting. We’ve found two companies that can do the job on Single Family Residences costing $160,000 for as little as $650. At this level the work easily pays for itself (at least on GO zone properties). While in general I found most Chattel Analysis companies will only work on “large” projects, some in fact do handle smaller properties. There are quite a few good articles out there on the net…
Most CPA’s are not qualified to do cost segregation studies and have to obtain the services of a qualified engineer (required by IRS), which many do not have access to.
Most CPA’s and Tax professional also feel that doing cost segregation studies on projects this small, will not bring much of a return. This is the reason engineering companies will only take on larger projects. Be cautious about companies that say they can do a property study for $650 for a project this small, you just may be throwing away money. Something you may consider is consulting a company that actually has a business and tax law consultant (attorney), before choosing a company to do a study on a project this small. If they are a reputable company they should offer you a free consultation before you spend any money upfront, in order to determine the approximate dollar amount of your cost segregation refund.