Discover the benefits of cost segregation for real estate investors, learning how to manage this tax and implement an effective tax strategy is achievable by accelerating depreciation deductions and deferring general and state income. However, to put it more simply, it is a way to reclassify assets to maximize categorization of the purchase price to personal property and land improvements while still minimizing allocation to real property. Implementing certain strategies can significantly reduce the amount of taxes owed, for your property in Massachusetts, we will be able to help and guide you with cost segregation benefits.

 

Cost segregation what is it and is it worth it?

Buying real estate is expensive therefore real estate investors can turn to federal tax planning to help them boost their cash flows when purchasing, building, or renovating residential or commercial real estate. Cost segregation will be able to give you the financial relief that you need in order to make it possible for you to invest or build more real estate.

Therefore in essence cost segregation is a way in which real estate investors are able to deduct the depreciation of a property against their taxable income. The depreciation value can be written off on your income taxes over a period of time and will vary depending on the type of property. Cost segregation allows you to speed up the depreciation schedule, increasing the amount that you can deduct each year.

For many real estate investors, the upfront cost of conducting a study can be set off by immediate tax savings. The benefits vary therefore it is essential to consult with a tax professional to determine whether the cost segregation is a good fit for you as a real estate owner and investor.

 

The process of conducting a cost segregation study:

The process begins with a detailed analysis of costs and purchase price allocations, architectural drawings, and any other relevant data. A site visit is often conducted to identify and photograph the property and its assets. The detailed study is essential in maximizing the tax benefits of cost segregation, it determines which parts can be depreciated over a shorter period. The data is then used to allocate the costs to specific categories for tax purposes, and a report is then prepared with the findings.

These studies are particularly relevant for properties undergoing significant renovations, expansions, or new construction.

 

Several key benefits of cost segregation:

• Reduced tax liability: by front-loading depreciation on shorter-lived assets, you can significantly reduce your taxable income in the early years of ownership, therefore being able to translate into substantial tax savings.
• Enhanced Return on Investment (ROI): with cost segregation, you can potentially accelerate your return on investment and improve the overall financial performance of your commercial real estate investment.
  • For real estate investors being able to understand and apply cost segregation can lead to significant tax advantages.
• Bonus depreciation: This is yet another tax incentive that often compliments cost segregation, contact us for more information on bonus depreciation.

 

How to use cost segregation in real estate:

Depreciation is a tax term used to describe the reduction in value of an asset over its lifetime. Therefore in the tax world, depreciation is a non-cash expense, meaning that it is an expense that is an accounting entry rather than an actual out-of-pocket cost.

1. Own residential income-producing real estate:

• If you own real estate then you are eligible to obtain depreciation. However, if you use the property for business or for producing income (such as rental income) then this amount can be depreciated.

 

2. Determine Depreciation Date:

• In terms of the IRS rules it states that residential income-producing property can be depreciated over 27.5 years. Depending on what you use and utilize your property for will depend on whether a cost depreciation study may be worth it for the depreciation tax savings.

 

A cost segregation study will be useful to those investors who purchased or built investment real estate in or during the last 15 years. You can take advantage of cost segregation strategies whether your investment properties are residential or commercial. Sometimes cost segregation may not be the right move for certain investors however it can help and assist investors who want access to more cash.