Benefits Of Cost Segregation Studies
With the growth of the real estate market improving day by day, some investors are now becoming more and more focused on the maximization of returns on the investment for commercial real estate projects that they undertake. Most commercially rented properties do depreciate over 40 years while the residential rental properties can depreciate over 28 years. Some building components may qualify for a much shorter depreciation recovery period of even 7- 15 years. The cost segregation studies are often utilized to reallocate the building costs.
When a commercial property is bought or even constructed, that building becomes an asset. Owners can even take the portions of purchase and consider as taxable income deductions every year in the schedule. The cost segregation studies and cost seg services analyzes the components that would make up the building and it is also a process in which the detailed entries are made in a fixed asset kind of system for all sorts of properties, long term and short term. For example: Some aspects of properties can be assigned a 3, 5, 7 or even 15-year tax lives. The shorter kinds of life spans are completely depreciated in an accelerated rate, which indeed dramatically increases the tax payers and the federal tax deductions.
A property analysis example:
One of the best ways to properly illustrate the effects of the cost segregation is to compare the property with a study and without one. A tax payer buys a house for 1.5 million dollars, excluding the land. If no study is performed, then the taxpayer would enter the cost into a fixed asset system as a 40-year property. After the initial first 5 years, the taxpayer would have collected $1, 55,000 in depreciation costs.
Some cost segregation studies have been rising since the year 1997 when the tax court case of Hospital Corporation of The USA Inc. affirmed the use of them. Some recent court cases and IRS rulings have indeed modified some landscape regarding the cost segregation studies. Due to the complexity of some final regulations and also potentially significant impact in the taxpayers, the real estate owners, the IRS have moved to issue Revenue Procedure of 2015-2020. Some brand new IRS guidance provides some sorts of simplified kind of certain small businesses and also clarifications regarding the implementation of its provisions.
A sort of careful analysis of the cost allocation of the real estate projects and also some improvements can provide considerable after-tax money flow for the real estate investors. The tax payers should indeed work with the real estate attorneys and the CPA or cost segregation specialists in order to maximize the real estate investments returns by correctly analyzing the cost allocations.