Cost Segregation???

15 Replies

Hello, I recently bought a small store just outside of LA, and my accountant was telling me if I wanted to save some money on my income taxes for next tax season, I should consider a Cost Segregation Study. He told me since I just bought this building; I can depreciate the components or something. He wasn’t too clear. Does anyone know anything about Cost Segregation or where I can go to get more information or get one done?

A Cost Segregation Study is a tactical tax savings tool that allows property owners, who have constructed, recently purchased, expanded, or remodeled any kind of real property to increase their cash flows by accelerating the depreciation deductions of reclassified building assets and deferring state and federal income taxes. The primary goal of a Cost Segregation Study is to identify all building construction costs that can be reclassified into 5, 7, and 15 year properties.

There's a tool called Depreciate'Em that is listed on BiggerPockets Software page

(http://biggerpockets.com/software.html)

I have found the DepreciateEm.com site to be quite useful.

Fred & Sherry -
It is convenient that you both joined the site on the same day, you're both posting from the same IP, and the question/answer worked out to be the perfect ad for your company, Fred.

Nice try. Many people have tried this ploy before to SPAM the site and have failed as you have.

Please don't be manipulative. If you want to promote your company, you can pay for an ad. You are no longer allowed to post on the site because of the antics.

It's too bad that this was the first forum post when I searched for cost segregation.  However, it was nice to see the boss squashing the SPAM (even if it was 11 years ago).  More evidence that I'm in the right place.  Thanks.  

Whenever I do a search for costsegregation, this thread comes up...puts a smile on my face :)

Just heard about Cost Segregation for the first time today.  Did a quick search to find out more and got this thread.  Quite an interesting start to it, but still confused and want some more info!

Originally posted by @Mike Gel :

Just heard about Cost Segregation for the first time today.  Did a quick search to find out more and got this thread.  Quite an interesting start to it, but still confused and want some more info!

There is a lot of great info if you search the forums, unfortunately, we're still waiting for BP to publish a book all about cost seg. 😉

I'm happy to answer any questions as they come up.

 

@Yonah Weiss how do we determine if a cost segregation study is worth it? And is there a way to get an estimate on the costs to perform one. We're about to close on our first duplex in CA. And we live in CA so our tax rates are high. Would love some additional information or message you if that's ok? 

Originally posted by @Yonah Weiss :
we're still waiting for BP to publish a book all about cost seg. 😉 

A book about cost seg? What would it contain except "just do it"? :)

 

Originally posted by @Jennifer Feldstein :

@Yonah Weiss how do we determine if a cost segregation study is worth it? And is there a way to get an estimate on the costs to perform one. We're about to close on our first duplex in CA. And we live in CA so our tax rates are high. Would love some additional information or message you if that's ok? 

Absolutely do contact Yonah, he is the best person to answer your cost seg questions.

As far as determining feasibility, it is usually done by your tax accountant who can estimate your immediate and future tax savings. Just make sure that your accountant is knowledgeable in cost segregation.

 

Even the American Institute of CPAs (AICPA) recommends that their CPAs get a cost segregation study done on properties over a purchase price of $750k. Today, it is also cost effective to do studies on smaller investments. I am with @Michael Plaks , just do it...if it makes sense. There are a few reasons not to do a cost seg study: 1. the purchase price on the property was less than $200k. 2. You don't pay any taxes now. 3. You intend to sell the property in 1-2 years. There are very few other unique reasons. You do need to ask a lot of questions. Companies offering cost segregation services are not all the same. 

For those new to the idea of cost segregation, it is like getting a free loan from the IRS. And, if and when you decide to sell the property and have to pay some of it back ("recapture") it is at a lower dollar value and, typically, at a lower tax rate. In the meantime, think "time value of money", you get the use of that money to leverage into another property, do needed renovations on an existing property, pay for your kids college tuition, or keep your business afloat until this pandemic goes away and you can take a needed vacation.

Depending on the type of property, the tangible property typically represents about 30% to 40% of the property's purchase price. We cannot depreciate land and the building's structure goes on to depreciate over the expected life of the property: 27.5 years for residential and 39 years for commercial. 

A good cost segregation study is engineering-based, the IRS' preferred methodology. A well done study requires someone knowledgeable in the fields of engineering, construction and tax law to do the study. During a study, your property is analyzed in detail and involves separating the tangible property from the structure of the building. Under current tax law and regulations, the tangible property can be depreciated up-front. The after-tax cash flow available to you is usually 6-10% of the purchase price of the property plus any repairs/renovations. And, don't forget that a study can be done on properties you purchased some time ago as well as new purchases and newly constructed properties.