Cost segregation studies can be a great way to accelerate depreciation and save taxes today rather than waiting for years to take a deduction. So let’s talk about how a property owner can save.
WHAT IS A COST SEGREGATION STUDY?
Cost segregation studies allow a property owner to break up the costs of a building into different components. Some of these components can then be depreciated faster than the building itself.
HOW MUCH FASTER?
Well it depends. Normally a building is depreciated or written-off over a period of 27.5 years for residential real estate and 39 years for commercial property. But if a part of the building can be considered to be leasehold improvements or personal property, those parts can be depreciated over 15, 7, or even 5 years. So this can be a big time difference.
THAT IS A BIG TIME DIFFERENCE.
Yes and many times the 15 year, 7 year or 5 year property can be written off all in the first year. This is done by electing bonus depreciation or Section 179. I don’t like to throw code sections around, but most business owners know what Section 179 is.
FOR THOSE THAT DON’T KNOW, WHAT IS SECTION 179?
This is an election that certain business owners can make to write off an asset in the year that they purchase it. In order to take advantage of this election, the business must have income. There is another election that can be made for those business that do not have income, and that is bonus depreciation, which also allow a full write-off, at least for 2022.
ISNT THIS JUST A TIMING DIFFERENCE ON WHEN YOU CAN ACTUALLY TAKE THE DEPRECIATION, IT DOES NOT GIVE YOU ANY ADDITIONAL DEPRECIATION, CORRECT?
That is correct, it is all about timing unless you use some other tax deferral or elimination strategies.
A building owner can actually use a like-kind exchange to defer the tax even longer. They can take the faster write-off now and then if they sell the building, they can either pay tax on the gain at that time or they can roll the gain into the next business property. Other things people do is to keep the property until they pass away and get the benefits of the step up in basis which allows the beneficiary to depreciate it all over again.
LAST THING SINCE WE ARE RUNNING OUT OF TIME, IS THIS SOMETHING THAT HAWKINS CAN DO?
We can assist quite a bit with the planning, but the cost study itself needs to be done by someone with an engineering background.
Be sure to talk to one of our professionals if you have any questions regarding Cost Segregation Studies.