Turn Past Properties Into Present Tax Savings

Many real estate investors assume that if they never did a cost segregation study when they bought a property, the opportunity is gone. In many cases, that is not true.

A retroactive cost segregation study allows property owners to look back and identify depreciation they could have claimed in prior years without having to amend old tax returns. The study reclassifies certain building components into shorter depreciation lives rather than the standard building life, which can create significant missed depreciation deductions.

Instead of revising past returns, the catch-up amount is generally claimed as a lump-sum deduction on the current year's return through IRS Form 3115. This is an IRS-recognized accounting method change that allows investors to benefit from depreciation they may have missed over the years.

For example, a commercial property purchased in 2014 and depreciated using the standard method may later undergo a cost segregation study that identifies hundreds of thousands of dollars of depreciation that could have been accelerated. That missed depreciation can potentially be claimed all at once in the current year.

The biggest advantages are unlocking deductions that were never claimed, reducing the current tax burden, improving cash flow, and avoiding the need to amend prior returns. However, a retroactive study may not make sense if you expect to sell the property soon, if the cost of the study outweighs the potential benefit, or if you already have more deductions than you currently need.

If you've owned an income-producing property for years and never completed a cost segregation study, now may be a good time to ask your CPA whether a look-back study is worth evaluating.