What is Cost Segregation and how can it help your business?
Q&A with Chamber Member, David H. Trahan
What is Cost Segregation?
Cost segregation is a depreciation method recommended by the IRS that allows owners of commercial real estate owners (including multifamily properties), the option of accelerating depreciation on component parts of the improvements, thereby deferring their income taxes and increasing their after tax cash flow.
How much can I save annually using this application?
Depending upon the property type, real estate owners can defer between $70,000 and $100,000 per $1,000,000 of value over 5 years by applying cost segregation.
Who can provide a cost segregation study?
The IRS states that the most preferred method is an engineered based analysis. The "most certain" method is performed by degreed engineers and includes a property inspection and a person who has experience in estimating and allocating costs.
How do I know whether a cost segregation study will help me on my property?
Since each property owner is unique, my company prepares a NO COST preliminary estimate on the amount a tax payer can be expected to save along with a fixed fee quote on the cost of having the study performed. Because each tax payer is unique, only consultation with your tax professional will tell you whether cost segregation makes sense for you.
Does applying cost segregation increase my risk of getting my tax return audited?
On the contrary, the IRS recommends cost segregation and tax payers who apply cost segregation have no higher risk of being audited. In some cases owners who apply cost segregation have a lower risk of getting audited.
What types of property does cost segregation work for?
Any type of commercial or multifamily property including retail, restaurants, hospitality, warehouses, offices, self storage, apartments, motels, etc.
How large must my property be for cost segregation to make sense?
Cost segregation works on properties exceeding $600,000 in value. The greatest benefit comes from those properties with greater finishes such as motels, restaurants, offices and retail.
I bought my property several years ago. Can I now apply cost segregation?
Yes. Owners can choose to switch to cost segregation at any time during their ownership. However the sooner one applies cost segregation the greater the tax benefits. Over a long period of time the tax benefits diminish. The only way to determine whether it is beneficial is to request a free preliminary analysis.
How does a study help me when I make improvements on the property?
There are some special rules and deductions that apply to real estate owners when they make improvements to their property that can be addressed by a cost segregation specialist.
What are the 2014 Tangible Property Regulations and how do they affect me?
The 2014 Tangible Property Regulations created the greatest changes to the tax code in 20 years and affected every commercial real estate owner in the U.S. While cost segregation is optional, compliance with these new regulations are mandatory. We work with your tax professional to ensure compliance with these regulations.
I am a tenant however I paid for my tenant improvements. Can I benefit?
Yes. The IRS says that whoever spent the money gets to depreciate the costs.
By applying cost segregation, do I get more depreciation over the life of the property?
No. Assuming that you hold a commercial property for 39 years, you would get the same amount of depreciation. With cost segregation, you are simply getting your benefits (depreciation) sooner.
The question is "Do you want your money now so that you can invest the money in your business or would you prefer to wait till later to get the money?"
For more information visit www.dtrahan.com or contact me at email@example.com or 832.971.2885