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  • Writer's pictureAJ Shepard

What is Cost Segregation?

What is cost segregation? 

So how does cost segregation work? Allow me to explain it in the most simplest way possible. Cost Segregation is a tax planning strategy used by savvy commercial real estate investors that accelerates the depreciation of certain components of their properties. In return, this can reduce current tax liability resulting in upfront cash flow.

Think of it this way, the benefits of cost segregation are comparable to borrowing money from the government – interest-free. This is what I meant when I said people are leaving money on the table. There are no rules when it comes to what you do with the cash. Typically, when talking to real estate investors, I recommend they use the cash to make improvements on the building, or better yet – use it for the down payment on your next acquisition.

Now there may be questions running through your head such as, how does cost segregation depreciation work? How does cost segregation benefit me? Or is cost segregation worth it? Your building has value – and over time that value depreciates due to normal use and deterioration. In years past – the IRS considered a building as a single asset which was depreciated straight-line, over 39 years for non-residential commercial properties, or 27.5 years for commercial residential properties. In layman’s terms, let’s say you own a non-residential commercial building. During the first 39 years of ownership, you get a tax deduction of 1/39th of the building’s value, each year.

Although these depreciation expenses are helpful at tax time, there’s a smarter way to do it. We all know well that most components within a building don’t last 39 years. With cost segregation, pieces of the building like carpeting, specialty lighting, certain plumbing fixtures, and landscaping can be “segregated” from the building.These segregated assets can be expensed faster, on a 5, 7 or 15-year schedule, based on their individual depreciable lives – as opposed to being part of the building’s 39-year straight-line depreciation schedule.

What does this mean for you? Cost Segregation is a great strategy for helping you grow your net worth faster by significantly reducing your current tax liability, using the upfront cash for additional investing.

Original blog posted by Titan Echo:

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