Have you had the pleasure of playing the real estate investment boardgame Monopoly? For anyone who’s shuffled the game's distinctive pieces across the board, “bought” and “sold” teeny houses and hotels, lost a pseudo fortune to a well-invested opponent, or scored some of that characteristically colorful money with a fortuitous Community Chest card, you know it’s a game of strategy. Your friends who scrutinized their investments and calculated every move usually won the game.
Real estate investment in the real world also requires prudent strategies, whether flipping property or investing for the long-term.
There are strategies for purchase and construction, location, property purpose or use, and tax strategies, just to name a few. Conducting calculated moves in these areas help real estate investors maximize their money and efforts.
What tax planning strategy should all real estate investors employ in order to preserve capital and receive substantial tax savings? Cost segregation. This IRS-approved method does just that through accelerated depreciation and future dispositions.
Less Gets You More
A building typically holds a depreciable life of 39 or 27.5 years for commercial and residential properties, respectively. A cost segregation study reclassifies building interior and exterior components and shrinks depreciation periods down to 5, 7, or 15 years, resulting in a reduced tax liability and increased cash flow for the property owner.
The proprietor can then wield this new-found capital to pay down loans, invest in new business equipment, or acquire additional properties.
A quality real estate cost segregation study assigns values to all real property components (part of the building/structural components), such as HVAC systems, plumbing systems, windows, elevators, doors, etc.
Assigning specific costs for these items will allow the property owner to write off the remaining depreciable basis in the current tax year should the items be replaced.
New tax legislation that resulted from the Tax Cuts and Jobs Act (TCJA) has elevated cost segregation’s appeal more than ever. One attractive revision again increased the bonus depreciation to 100% for properties placed in service after September 27, 2017 - unless subject to a binding contract prior to that date.
This adjustment allows for immediate expensing of all shorter life property identified by the study in the year the property is placed in service.
The Bonus Round
Furthermore, bonus depreciation is now available for used property if the property is “first use” to the taxpayer (previously unused by anyone).
Previous rules only allowed new construction and renovations to qualify for bonus depreciation. This is a major game changer for real estate investors who routinely acquire used properties versus building brand new.
The TCJA also increased Section 179 expensing to $1 million, with an increased cap of $2.5 million. Combined with the 100% bonus depreciation, this helps offset the C-Corporation tax rate reduction to 21percent.
These enrichments certainly boost a cost segregation study’s value for any real estate investor, no matter their type of entity.
A competent cost segregation services specialist who possesses a strong background in engineering, construction, and tax can help you maximize the available benefits for your real estate investments. Call on one today who can deliver a thorough, reliable, and sustainable cost segregation report.