Donna Genie explains how cost segregation studies break down properties into components to accelerate depreciation and lower taxable income. A study costs between $3,000 and $15,000 depending on property size, and different asset classes have recovery periods ranging from 5 to 39 years. The IRS requires proper documentation, so DIY attempts often fail.
27.5 years
39 years
5 years
15 years
Approximately $1,000 to $2,000
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 deposits 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 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 segreg study, so really depends on what you've 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 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. I'm Donna Bordeaux with pyopaccounting.com Please follow us on Facebook and Instagram. Make sure you check out our blog and our website from the link below. Subscribe to our YouTube channel and hit the bell to be notified when we post. To contact me, email me at donna@pyopaccounting.com.
