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Why it might be time to consider cost segregation

Cost segregation is a valuable tax-saving strategy for commercial real estate owners, helping them maximize depreciation deductions and improve cash flow. With the phase-out of bonus depreciation on the horizon, now is the ideal time to consider a cost segregation study to take advantage of this valuable tax benefit while it’s still available. In this blog post, we’ll dive into the concept of cost segregation, explore its benefits, and explain why it’s worth considering a cost segregation study now more than ever.

What is Cost Segregation?

Cost segregation is a tax strategy that allows commercial real estate owners to reclassify certain property assets into shorter depreciable life categories. In essence, it breaks down a property into its various components, assigning each component a specific depreciation schedule based on its useful life.

The primary goal of a cost segregation study is to accelerate depreciation deductions by identifying assets that can be depreciated over shorter periods, typically 5, 7, or 15 years, instead of the standard 27.5 or 39-year period for residential and non-residential properties, respectively.

Benefits of Cost Segregation

Accelerated Depreciation: By reclassifying assets into shorter depreciable life categories, cost segregation allows property owners to claim higher depreciation deductions in the earlier years of property ownership. This front-loading of depreciation can significantly improve cash flow.

Tax Savings: Accelerated depreciation reduces taxable income, which in turn lowers the property owner’s tax liability. This can result in substantial tax savings over the life of the property.

Improved ROI: Cost segregation not only generates immediate tax savings but also helps increase the overall return on investment (ROI) for property owners by freeing up cash that can be reinvested into the business or used for other purposes.

The Role of Bonus Depreciation

Bonus depreciation is a tax incentive that allows businesses to deduct a large percentage of the cost of eligible assets in the year they are placed in service. The Tax Cuts and Jobs Act (TCJA) of 2017 temporarily increased bonus depreciation to 100% for qualifying assets acquired and placed in service between September 27, 2017, and December 31, 2022.

The combination of cost segregation and bonus depreciation can result in substantial tax savings for commercial real estate owners. However, the 100% bonus depreciation benefit is set to be phased out, decreasing to 80% in 2023, 60% in 2024, and completely expiring by the end of 2026.

Why You Should Consider a Cost Segregation Study Now

As bonus depreciation phases out, commercial real estate owners may miss out on significant tax savings if they don’t act soon. Conducting a cost segregation study now can help you take advantage of the current 100% bonus depreciation before it begins to decrease in 2023. By accelerating your depreciation deductions, you can improve cash flow, reduce tax liability, and increase your property’s ROI.

Moreover, cost segregation studies can be performed on properties acquired or constructed in previous years. If you have not conducted a cost segregation study on your existing property, you may be eligible to claim missed depreciation deductions through a catch-up provision, further increasing your tax savings.

With the phase-out of bonus depreciation approaching, now is the perfect time for commercial real estate owners to explore the benefits of cost segregation. By conducting a cost segregation study, you can maximize depreciation deductions, reduce tax liability, and improve your property’s cash flow and ROI. Consult with a qualified tax professional or cost segregation expert to determine if a cost segregation study is right for your property and to help you navigate the complexities of this valuable tax strategy.

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