Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.
Remind me…what is Cost Segregation again?
A cost segregation study is the process of separating out personal property from the real property.
This is important because the real property must be depreciated over 39 years…while the personal property can be depreciated much quicker. Certain components of the building and building systems can be depreciated over 5, 7, 10 or 15 years.
Remember, the more you’re able to depreciate…the less income tax you pay in a given year. More depreciation is good. Faster depreciation is good.
For many commercial buildings, the personal property might be special electrical, lighting, water, plumbing, mechanical, and finish components.
It’s not uncommon to identify 25%-50% of the building’s total costs to be eligible for reclassification into shorter life assets.
Cost Segregation Studies are a lucrative tax strategy that should be considered in almost every real estate purchase.
An average study for a $1 million purchase (or new construction) could generate over $250,000 of accelerated depreciation when compared to the standard 39 year method.
If you haven’t purchased a cost segregation study on your property, there is a good probability that you missed out on tax deductions in the form of additional depreciation expenses earlier in the life of the property.
Commercial real estate depreciation benefits will generally be maximized as a result of a detailed, engineering-approach cost segregation study. Remember, as the depreciation deductions increase…your current tax liability decreases…thereby improving your cash flow and increasing after-tax profits.
Cost segregation studies became even more valuable with the recent Tax Cuts and Jobs Act (TCJA) changes to depreciation rules.
It’s worth evaluating a cost segregation study on a property of any size. Commercial property owners may even consider the benefits of a study on a building improvement or addition with a cost basis as low as $250,000.
It’s never too late to perform a cost segregation study. If you missed taking advantage of these benefits in the year the property was initially purchased (or constructed), you can still do a look-back study if the building was acquired after 1986. With a look-back study you will claim all of the prior years’ missed depreciation deduction in one year.
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About Beau Beach, MBA CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@BeachwoodSells.com