Cost Segregation

According to Bob Keebler, Tax Attorney and author of The Top 40 Tax Planning Opportunities for 2024 “cost segregation studies can produce tax savings in two ways. First, they can substantially increase the present value of depreciation deductions and increase cash flow. Without cost segregation, taxpayers must depreciate residential property using straight-line depreciation over a 27.5-year period182 and non-residential property using a straight-line method over 39 years. Cost segregation may enable the taxpayer to depreciate part of the cost of a building over a shorter period of time using a faster depreciation method.

A second benefit of a cost segregation analysis is that it can increase the amount of property subject to depreciation by reallocating the purchase price of a building between building components and tangible personal property or between land and land improvements.”

The way this works is that the owner of a building will hire a cost segregation firm to conduct a study, during which the engineering firm will segregate a building into 5 components:

• Five-year personal property

• Seven-year personal property

• Land improvements

• Buildings

• Land

The goal here is to increase the present value of the depreciation deductions, which means a bigger tax break now and more money in your pocket. With cost segregation, similar to a CRT (charitable remainder trust), the tax bill isn’t going away, its just being paid over a different and more preferential time period, which means the time value of money is working to your advantage. This is common with tax planning strategies.

In the example Bob uses, a $10M building that undergoes a cost segregation study produces an additional $171,000 in tax savings!

Like all tax planning strategies, you need to understand the potential advantages and disadvantages. For example, a cost segregation study won’t make a lot of sense if you plan to sell the building in the next year or two. They also bring things like depreciation recapture into play.

Therefore, it is vital to produce a personal 10-year cash flow report before engaging in these strategies.

As always, we recommend working with a tax professional who understands both tax strategies and wealth management.