Cost Segregation Studies

When it comes to capitalizing on real estate assets, small and mid-sized businesses have some catching up to do. Larger corporations are generally more familiar with the cost segregation approach, which has been used by big businesses for decades to identify and document costs that can be separated from a primary property function. Once identified, these costs can be depreciated more rapidly or depreciated as capital expenditures. Although cost segregation is less common among smaller businesses, there are many benefits of using this approach. A cost segregation study helps you find ways to save on taxes by understanding the true costs of your properties. Here’s what you need to know about cost segregation studies so you can determine if they could benefit your business.

What is a cost segregation study?

Cost segregation is the identification of select construction or acquisition costs that can be separated from a primary property’s function as a depreciable asset. In other words, a cost segregation study is a method of identifying the costs that do not qualify as real property by breaking down the components that make up a property. This method allows owners and investors to depreciate certain costs, such as building materials, more quickly than others like the building’s structure. The purpose of cost segregation is to accelerate the depreciation of the non-real property components, thereby reducing the investor’s taxable income from the property. This results in tax savings, as these costs are depreciated over a shorter period of time.

Why do a cost segregation study?

Cost segregation is a method of identifying the costs that do not qualify as real property by breaking down the components that make up a property. This method allows owners and investors to depreciate certain costs more quickly than others like the building’s structure. The purpose of cost segregation is to accelerate the depreciation of the non-real property components, thereby reducing the investor’s taxable income. This results in tax savings, as these costs are depreciated over a shorter period of time.

How does a cost segregation study work?

A cost segregation study is a detailed analysis of the construction costs associated with an asset. The goal is to separate out the non-real property costs (such as labor, financing costs, insurance, and materials) by analyzing the construction costs. Once the non-real property costs are identified, they can be depreciated over a shorter period of time than the primary property. If you’re thinking of doing a cost segregation study, there are a few things you should keep in mind. First, cost segregation must be done as soon as possible after the acquisition of the property. Second, a cost segregation must be done by a third-party engineer or architect who has no stake in the outcome of the study. Third, the appropriate governing authorities must be notified before the study is undertaken.

Benefits of a Cost Segregation Study

Cost segregation studies can provide significant tax savings for owners of commercial properties. The study identifies construction costs that can be more quickly depreciated and capital expenditures that can be expensed. Here are some of the benefits of conducting a cost segregation study. - Recognizing true construction costs : A cost segregation study helps you recognize the actual construction costs of your property. It breaks down the expenses associated with the property into their various components. These include items like materials, labor, financing costs, and insurance. - Accelerated depreciation : A cost segregation study can help you accelerate the depreciation of the non-real property costs associated with your property. This means that you can write off the costs of the non-real properties over a shorter period of time. - Capitalizing expenses : A cost segregation study can also help you capitalize certain costs. These include items like interest expenses, property taxes, insurance, and equity injections.

Limitations of a Cost Segregation Study

Taxpayers do not have carte blanche to select which costs are subject to accelerated depreciation. There are specific requirements that must be met before a taxpayer can accelerate the depreciation of certain costs. Cost segregation may not be appropriate if the following conditions are present: - The study is not completed by a third-party engineer or architect who has no stake in the outcome of the study. - The appropriate governing authorities have not been notified before the study is undertaken. - The study is not conducted as soon as possible after the acquisition of the property. - The study does not identify construction costs that can be more quickly depreciated.

Conclusion

Cost segregation studies help you identify the true construction costs of your property by breaking down the expenses associated with the property into their various components. This method can help you accelerate the depreciation of the non-real property costs and capitalize certain construction costs, thereby reducing your taxable income. Cost segregation studies are most beneficial for commercial property owners and investors, as these individuals can benefit from accelerated depreciation and capitalizing certain expenses.