Category Archives: Cost Segregation

Cost segregation is a powerful and necessary part of accurately calculating depreciation for real property. Recent changes in tax regulations make cost segregation more attractive and allow it to be implemented years after the completion of a real estate purchase. Commercial real estate owners can generate meaningful federal income tax reduction by using catch-up depreciation for buildings acquired or built after 1986. This implies the level of tax deductions, affecting a large tax cut.

How does it work?
Historically most depreciation schedules are split between land and long-life property. Long-life property depreciates over 27.5 years for apartments and 39 years for most commercial properties. A cost segregation study can typically allocate 20% to 40% of the improvement basis to short-life categories.

High income owners typically pay 35% federal tax rate on ordinary income and a 15% rate on capital gains. The mechanics of reporting a gain on a sale usually allocates most of the income to capital gains, which is taxed at 15%, by increasing tax deductions (depreciation). The commercial real estate owner pays the capital gains tax (15% maximum) for most income and also defers payment of federal income tax.

A cost segregation study reduces the amount of long-life property, which is recaptured at 25% by allocating more of the basis to 5, 7 and 15-year property. If cost segregation is utilized from inception until gain on the property is recognized, it can reduce federal tax rate from 35% to 15% for most investors. The exceptions are C Corporations, … Read the rest