Real estate investors and contractors who have purchased, renovated, or constructed a building should explore conducting a cost segregation study to unlock accelerated depreciation benefits. This strategy provides tax savings for new acquisitions and existing properties.
Identifying assets eligible for accelerated depreciation, as well as components that may be replaced in the future, allows property owners to reclassify key components such as roofs, HVAC systems, doors, windows, flooring, signage, landscaping, and parking lots, leading to faster tax savings. Converting assets from real property to personal property shortens depreciation periods, turning 39- or 27.5-year assets into 5-, 7-, or 15-year assets. In addition, separately stating components of a building structure allows loss deductions when the component is replaced.
A cost segregation study can be done on a wide range of property types, including commercial properties like office buildings, hotels, and retail spaces; residential properties such as apartment complexes and multi-family units; industrial properties like manufacturing plants and warehouses; and mixed-use buildings combining commercial, residential, or industrial functions. Specialty properties such as hospitals, sports arenas, and entertainment venues may also benefit from this tax-saving approach.
The Tax Cuts and Jobs Act (TCJA) made a cost segregation study even more advantageous by introducing key changes, including expanding bonus depreciation for qualifying property. This change allows the property to be fully or partially expensed depending on the year it’s placed in service. Starting after December 31, 2022, the bonus depreciation rate began phasing down from 100%. Property placed in service in 2023 qualifies for 80% bonus depreciation, followed by 60% in 2024, 40% in 2025, 20% in 2026 and 0% in 2027.
Although a cost segregation study requires an investment of time and money, the potential tax savings can easily outweigh the expense. The IRS recommends using qualified professionals, such as CPAs and engineers, to ensure compliance with tax regulations and avoid issues. Many experts offer a free feasibility study to estimate potential savings before proceeding.
However, a properly conducted study is crucial to avoid IRS problems. Inadequate documentation, such as missing invoices or incomplete asset descriptions, can result in disallowed deductions or penalties. Additionally, misclassifying assets can lead to incorrect depreciation schedules, increasing the risk of audit complications.
Contact your Stephano Slack tax manager/partner at 610-687-1600 or [email protected] to determine if you can benefit from a cost segregation study.
Author Christine Fisher-Guyer, CPA, Partner, has provided top-notch accounting services to Stephano Slack’s clients. She currently manages tax operations at the firm and is an excellent problem solver, especially regarding client concerns. Chris can be contacted at 610-710-4729 or [email protected].
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