Accelerate Your Depreciation Deductions with Cost Segregation

One significant tax benefit of owning residential rental property or non-residential commercial or investment property is depreciation—a deduction you get without spending any additional money. However, regular depreciation for real property is slow. Residential rental property is depreciated over 27.5 years and non-residential property over 39 years, providing a relatively small deduction each year.

Cost Segregation: Speed Up Your Depreciation Deductions
Fortunately, there is a way to speed up your depreciation deductions, especially during the first year or years you own the property: cost segregation.

What is Cost Segregation?
“Cost segregation” is the technical term for separately depreciating the elements of property that are not real property. These are elements other than land, buildings, and building components. They include:

• Improvements made to the land, such as landscaping, swimming pools, paved parking areas, and fences.

• Personal property items inside a building that are not building components—for example, refrigerators, stoves, dishwashers, and carpeting in residential rentals.

Benefits of Cost Segregation
Using cost segregation does not increase a property owner’s total depreciation deductions, but it does accelerate them over the first few years because:

• Personal property has a five- or seven-year depreciation period.

• Land improvements have a 15-year period.

Additional Advantages
By using bonus depreciation and/or Section 179 expensing, owners can deduct all or most of the cost of personal property and land improvements the first year they own the property, providing a potentially enormous first-year deduction.

Conducting a Cost Segregation Study
A cost segregation study must be conducted to identify which building elements are personal property and land improvements and then determine their depreciable basis. Studies can be conducted by engineers or done more cheaply with other methods that the IRS views as less reliable.

Considerations for Property Owners
Cost segregation may not be advisable for every property owner. For example, it may not be suitable if it results in a loss that can’t be deducted due to passive loss rules, or if the owner intends to sell the property within a few years and has to recapture the cost-segregated depreciation deductions as ordinary income.

Timing for Cost Segregation Studies
The best time to perform a cost segregation study is the same year you buy, build, or remodel your real property. However, you can wait until a future year—perhaps when you have enough rental or other passive income to use the accelerated depreciation deductions.

Conclusion
Cost segregation can be a powerful tool for property owners looking to accelerate their depreciation deductions and reduce their tax liability in the early years of property ownership. If you are considering cost segregation or have questions about how it can benefit your specific situation, please call me on my direct line at 425-243-2026. We are here to help you navigate these opportunities and optimize your tax strategy.