Hi, I’m Bette Hochberger, CPA, CGMA. Today I will discuss cost segregation in real estate. Cost segregation is important because it can provide significant tax benefits and improve cash flow for commercial or investment real estate owners. I’m here to teach and tell you more about it, so let’s dive in.

What Is Cost Segregation In Real Estate?

Cost segregation is a process used in real estate to identify and classify certain assets within a property for tax purposes. When someone buys real estate, they usually have to spread out the cost of the property over many years for tax purposes. This can take up to 27.5 or 39 years! But cost segregation can help break down the property into smaller parts, letting some things be written off faster. This means the person can get tax benefits sooner and doesn’t have to wait so long.

Note that cost segregation is not an option for your main home. You can only use this on homes you own as investments, not the ones where you live full-time. So if you’re considering this process, make sure it’s for a residential property that you own as an investment.

How Does It Work?

It really depends on the depreciation of your investment real estate. Depreciation is a deduction that real estate investors can take on their income taxes every year to help recover the cost of owning and maintaining a property. 

Cost segregation is a tax planning tool that helps investors speed up this process, which can reduce their annual federal and state income tax payments. You’ll need to pay for a study to break down the property into smaller parts to use it. By doing this, investors can have more money for other investments or expenses.

Why Is a Cost Segregation Study Important?

This process breaks down your property into smaller components, allowing certain assets to be classified as shorter-lived and depreciated over a shorter period of time. Accelerating the depreciation schedule can reduce your taxable income and lower your tax liability in the short term. This means more money in your pocket to invest in other opportunities or cover expenses. 

Remember that cost segregation for real estate investments is a complex process, so it’s important to work with a professional to ensure you do everything correctly.

 A tax professional specializing in cost segregation can thoroughly analyze your property to identify all the components that qualify for shorter depreciation schedules. A tax professional can also assist you in ensuring compliance with all tax regulations and conducting a correct study.

Overall, cost segregation is an important tool for real estate owners to maximize their tax benefits and improve their financial situation. If you’re looking for help with this process, feel free to schedule a meeting with me, and I’d be happy to help.

I hope you learned something new today. As always, stay safe, and I will see you next time.