Separate the personal property costs associated with real estate property. Owners of real estate have been arguably the hardest hit sector of the sagging global economy, but the decline in the real estate market has not alleviated the still sound benefits of owning property. As the tax season approaches, the last place one would expect to find monetary relief is the Internal Revenue Service. However, many markets experiencing declining property values, find it even more important to maximize the deductions allowable under the IRS tax codes. Real property owners enjoy tax deductions through mortgage interest payments and property depreciation. The miscalculations of these deductions could cost a property owner hundreds of thousands of dollars of tax savings each year. The perfect solution to appropriate scheduling of these deductions is a cost segregation study. Cost segregation studies are an allowance by the IRS and US tax law to separate the personal property costs associated with real estate property. This process of segregating personal property assets from real property assets provides the tax payer the opportunity to derive a new property tax deduction schedule and thus create a more accurate and decreased tax liability. An accurate cost segregation study of one?s property could not only bolster the property?s financial bottom line, but also put spent tax dollars back in a property owner?s pockets. How Cost Segregation Works? A cost segregation study is performed by a team of public accountants and engineers with extensive knowledge of tax code, construction and construction finance. The assets contained within a real estate structure are individually categorized as personal or real property. A cost segregation study differentiates between those personal and real assets within a property. While the foundation and frame are part of the real estate structure, the carpet, wall coverings and electrical wiring could be considered personal property and have a lesser life expectancy than the foundation and framing. Under IRS codes, personal property and real property are able to receive a depreciable tax benefit each year of the assets? life. Personal assets have a depreciable life of 5, 7 or 15 years. Residential and commercial properties respectively receive 27 and 39 years of depreciable life. Often times depreciation schedules are simply calculated with equal yearly tax deductions based on the property type alone. A cost segregation study reveals assets previously held under a 27 or 39 year real estate depreciation schedule and accelerates the personal property asset portions on a shorter depreciation schedule. This accelerated depreciation provides an immediate and greater depreciation deduction on tax returns. For example, a cost segregation study could change a normal depreciation deduction schedule of $15,000/year to a $100,000/year deduction, resulting in a substantially increased tax deduction. Who Should Consider Cost Segregation? Any property owner obligated to file taxes should consider a cost segregation study. A cost segregation study is retroactive and can be amended to tax returns dating back as much as five years, as long as the property was owned by the tax filer at the time of the back dated study. The cost segregation study can be used to counter taxes owed and offset a depressed cash flow. Cost segregation studies are applicable to all real estate property types and are a strategic cash flow management tool for any commercial property owner. Additionally, a good cost segregation study can be used to more efficiently and accurately calculate a 1031 exchange. Although cost segregation studies have been allowable for over a decade, many real property owners are re-classifying this seldom explored tool as an extremely valuable resource during the economically challenging time. Marcus M. White is a principal at Priority Capital Resource. He is a featured speaker on television and radio and a published author. He is a former institutional investor that also teaches classes in real estate development and investment. Marcus represents clients in various components of commercial finance and has significant expertise in commercial real estate and cost segregation. Contact him at [email protected] or (202) 210-0089.
