Donna Bordeaux explains cost segregation: breaking a property into components with faster depreciation schedules. Carpet depreciates in 5 years instead of the standard 27.5 for residential buildings. It's a timing advantage that costs $1,000 to $2,000 for small rentals, and you need a professional to do it right.
27.5 years
39 years
5 years
15 years
Can run into the tens of thousands of dollars
If you own residential or commercial real estate, you may benefit from a cost segregation study. A cost segregation study looks at the property and breaks it down into more components than just saying you bought a building and how this affects you is through taxes and depreciation. Depreciation on residential property in general is 27 and a half years and commercial property is 39 years. However, if you were to break out what you were buying, you're actually buying that building as well as some of the fixtures, things like lighting fixtures, carpeting, sidewalks. Those depreciate faster if they were individually broken out than just the building. So carpet, for example, would depreciate over five years, while sidewalks might be over 15 years. So speeding up depreciation can be the benefit of cost segregation. Through a cost segregation study, you will have a breakout of all of the different components of the building that can be depreciated faster than just the building. That will reduce your taxable income in any given year and help you pay less in taxes. However, you must remember this is purely a timing difference. It is not an overall benefit to taxes, just a pure timing difference. So you want to make sure that it's well worth your while. Cost segregation studies for commercial properties can run into the tens of thousands of dollars depending on how big the property is. You can also do smaller properties, residential rental properties, for example, probably around 1,000 to 2,000. You can do a cost segregation study, so it really depends on what you purchased. The cost segregation studies can also be very beneficial if you have purchased a furnished location, especially in commercial property, because those furnishings are depreciated much faster than the building as a whole. Now this really is not a do it yourself project. You'll need to employ a consultant to help you with the real estate study for that cost segregation. There are a few ways to do small ones in a do it yourself fashion, but you must be very careful to make sure that you have something that you can support if asked about it through the irs. So if you're interested in looking at the benefits of a cost segregation study for real estate that you may own, I'd be happy to help. Let me know. Thank you. I'm Donna Bordeaux from Calculated Moves. Please follow us on Facebook, Instagram and LinkedIn. Make sure you check out our blog and our website for the link below. Subscribe to our YouTube channel and hit the bell to be notified when we post. To contact me, email me@donnaalculatedmoves.com.
