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Who Performs a Cost Segregation Study?
Thankfully for those of us who are neither contractors nor tax lawyers, you don’t do a cost segregation study yourself. A qualified team of tax and engineering experts comes to inspect the components of your property — assessing everything from the plumbing to the flooring to the landscaping — to determine if you can accelerate the depreciation of any of these items.
This team will identify and segregate various building components into shorter depreciation periods. They’ll even examine architectural plans, engineering specifications, and construction records looking for opportunities for accelerated property depreciation.
At the end of the study, you’ll receive a detailed report concluding how much you can save on your taxes by using accelerated depreciation. The whole process can take upwards of a month from start to finish, for large apartment complexes.
How Much Do Cost Segregation Studies Cost?
Of course, you’ll pay for these professionals’ time and expertise.
Depending on the size and complexity of your property, you should expect to pay between $5,000 to $15,000 for a commercial cost segregation study and the recommendations in the report. That makes them unfeasibly expensive for most single-family or small multifamily rental properties.
Unless you use a DIY cost segregation study service, that is. Over the last few years, companies like Rental Property Refund have started offering an automated service to provide a lawful cost segregation study, based on a quick form that you fill out. It takes minutes instead of a month, and costs around $1,500 instead of $5-15K.
Landlords can often recoup this one-time cost through tax savings within a couple of years.
Accelerated Depreciation on a Rental Property
By accelerating depreciation deductions, owners of commercial property can realize significant tax benefits in the early years of ownership.
Many types of personal property (think appliances, furniture, and fixtures) depreciate quickly, often over just five or seven years. You can depreciate many types of land improvements — such as outdoor lighting, paving a driveway or parking lot, or fencing — over 15 years.
Accelerating the depreciation deductions for these components reduces your taxable income, creating potentially substantial tax savings. These tax savings can improve your cash flow, reduce your overall tax liability, and increase your property’s return on investment (ROI).
When Does a Cost Segregation Study Make Sense?
Given their cost, a cost segregation study doesn’t always make sense for everyone. You need to weigh the potential benefits against the study’s large, upfront cost.
That said, a cost segregation study makes great sense in the right situations. Consider a cost segregation study if you meet these conditions:
1. You own a commercial property or multifamily rental property. Large commercial properties or multifamily residential properties like apartment buildings, which often include a ton of personal property and other depreciable assets, tend to see the most benefit from a cost segregation study. Properties valued at about $500,000 or more make the best candidates for a worthwhile cost segregation study. And no, you can’t use cost segregation for your primary residence.
2. You have purchased, built, or remodeled your investment property recently. The best time to conduct a cost segregation study is the same year in which you buy, build, or renovate your investment property. This way you get the most value out of the tax savings from accelerated depreciation. And even if it’s been a few years, you can still do a “look-back” cost segregation study and claim a catch-up tax deduction.
3. You plan to hold the property for at least 3-5 years. It might take you a few years to fully recapture the upfront fees to conduct a cost segregation study, so it only makes sense if you plan to retain the property long enough to reap the tax savings from accelerated depreciation.
When in doubt, consult with your friendly neighborhood tax advisor or a qualified cost segregation specialist to determine the feasibility and potential benefits of a cost segregation study for your specific situation.
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