Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.
Cost Segregation can be performed on virtually any commercial property with the goal to increase depreciation deductions for tax reporting purposes.
Also known as accelerated depreciation, Cost segregation identifies portions of the property that can be depreciated more rapidly (5, 7, or 15 years) instead of applying the typical 39 years for non-residential commercial properties or 27.5 years for commercial residential properties. This increases cash flow in the earlier years of owning a commercial property.
How? You hire an expert and use their new depreciation calculations on your annual tax reporting. A professional will perform a cost segregation study, breaking the property into four categories for tax purposes. These will include:
When a property is originally purchased, the value of the land itself has to be determined. Land is never depreciated, so it must be “carved out” of the purchase price to determine the depreciable basis of the property’s improvements.
Auxiliary improvements, such as landscaping, roads, and fences, are examples in this category. These components must be extracted from the total property improvements to determine the building’s basis.
Tangible personal property
Assets that are not structural components of the building may be considered tangible personal property, and may potentially be depreciated sooner than the building itself. These include items like office furniture, floor coverings (vinyl/carpet), and some electrical components and fixtures.
This covers the basic shell of the building—the so-called “structural components.” These components typically remain as 39- or 27.5-year property, but the cost segregation process should quantify individual parts, such as roofing, elevators, and boilers, that may be replaced individually in the future. By quantifying their values up front, their remaining basis can be fully written off in the years they are replaced.
In short, cost segregation can help property owners depreciate certain portions of the property more rapidly in the beginning through reclassifying certain components to shorter depreciation lives and an accelerated depreciation schedule.
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About Beau Beach, 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, South Florida and Chicago 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 414.324.4938, 615.603.9770, click to schedule a call or Beau@ProwessIRES.com