Chances are you are depreciating your commercial investment property on a straight-line basis. Most people do. It’s a simple process, really. You subtract an estimate of the value of the land under your structure from the acquisition price and divide the remainder by 39 to determine your annual deduction. In doing so, you reduce your tax liability each year of the hold period. When you sell the property, all the depreciation you’ve taken is ‘recaptured’ at a federal tax rate of 25%, which is most likely lower than your ordinary income tax rate was while you owned the property. So, even with recapture, you come out ahead.
However, there is another depreciation methodology that is becoming more popular these days. It’s called cost segregation. While the total amount of depreciation available to you is the same as using the straight-line approach, cost segregation allows you to depreciate specific components of your property over shorter periods, accelerating the timeline of your tax deductions. This frees up capital to deploy elsewhere.
The benefits of cost segregation are best enjoyed if you deploy the strategy in the year you acquire the property, or as soon as possible thereafter. Though, experts say you may still be able to realize substantial tax savings even if you opt for cost segregation up to 10 years into the hold period.
Is cost segregation something you should consider? That depends on the unique characteristics of your property and how long you intend to keep it. Generally speaking, the more highly improved your property is, the better. If you recently purchased an office building, manufacturing facility, laboratory or hotel property, cost segregation could be highly beneficial. Making that determination will require a detailed Cost Segregation Study performed by experts who analyze every aspect of your property in order to assign a useful life of either 5, 7 or 15-years to each component. This would include such things as electrical panels & distribution, lighting, plumbing, office space, HVAC, irrigation systems, roof and more. Click here for more from AcuSolutions
Once the study is completed, it will be time to sit down with your accountant to determine whether it makes sense to move forward with cost segregation, and how you should deploy your tax savings to maximize the yield on your investment portfolio. You may decide to pocket the extra cash, pay down debt, make capital improvements to achieve higher rents or help fund the acquisition of other assets.
We have recent experience with several clients who have decided to use cost segregation, and we would be happy to share their case studies to assist you in evaluating the strategy for yourself. We also have strong working relationships with experts who specialize in conducting cost segregation studies. If you would like to learn more, just give us a call. We look forward to hearing from you.
Our sincere thanks to Vinil Ramchandran, President of AcuSolutions for his assistance in the preparation of this post
