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Cost Segregation

Cost segregation is a powerful tax accounting tool that allows commercial real estate owners to accelerate depreciation deductions and increase near-term cash flow. By classifying building components into different depreciation categories, cost segregation can significantly reduce your tax liability in the early years of ownership.

Understanding Cost Segregation

A cost segregation study is a detailed analysis of your building's components. It identifies and classifies components into different depreciation categories based on their useful life. The IRS allows certain building components to be depreciated over a shorter period than the building itself (typically 27.5 or 39 years). By depreciating these components over a shorter period, you can deduct more of the cost of your building in the early years of ownership, resulting in significant tax savings.

For example, a cost segregation study might identify and classify the following building components:

  • Personal property: These components, such as furniture, appliances, and removable partitions, can be depreciated over 5 or 7 years.
  • Land improvements: These components, such as sidewalks, landscaping, and parking lots, can be depreciated over 15 years.
  • Building structure: The remaining components of the building are depreciated over 27.5 or 39 years.

Benefits of Cost Segregation

There are several benefits to conducting a cost segregation study:

  • Increased cash flow: By accelerating depreciation deductions, cost segregation can significantly increase your near-term cash flow. This can free up capital for other investments or be used to pay down debt.
  • Tax deferral: Cost segregation allows you to defer taxes to later years, which can be a valuable financial planning tool.
  • Improved return on investment: By increasing cash flow and deferring taxes, cost segregation can improve the overall return on your real estate investment.
  • Increased accuracy: A cost segregation study provides a detailed asset analysis of your building, which can be used for other purposes such as insurance and property management.

Why You May Not Be Using Cost Segregation (and How Roble Can Help)

Some commercial real estate owners may not be using cost segregation because they are unaware of the benefits or believe that the cost of the study outweighs the potential savings. However, the potential tax savings from cost segregation can be significant, and Roble can help you determine if a cost segregation study is right for you. Our platform and estimator tool can help you estimate your potential savings and connect you with qualified professionals to conduct the study.

Estimating Your Potential Cost Segregation Savings

The amount of your potential cost segregation savings will depend on the type of building you own, its purchase price, and the results of the cost segregation study.

Example: Let's say you purchase a commercial office building for $10 million. A cost segregation study identifies $3 million of personal property and land improvements that can be depreciated over 5, 7, and 15 years. This results in an additional $1 million of depreciation deductions in the first year, which could save you $370,000 in taxes (assuming a 37% tax rate).

This example demonstrates the significant financial benefit available through cost segregation. By accelerating depreciation deductions, you can save money on taxes and improve the overall return on your real estate investment.

Ready to learn more? Contact Roble today to see how we can help you maximize your savings with cost segregation.