Why should you even care about a cost segregation study, let alone a quality one? Four words: Less tax; more control.
A quality cost segregation study will allow you to accelerate depreciation for your real estate property by separating the purchase price of a real estate property into four categories:
Personal property. You can normally depreciate this property for 5 -7 years. Common personal property items include furniture, carpeting, certain fixtures and window treatments.
Land improvements. These have a shorter useful life than buildings (real property), but longer than personal property. These are usually depreciated over 15 years. This could include fences, paving, driveways and the like.
Building. Just like personal property and land improvements, the strategy is to maximize the building value as opposed to non-depreciable land. However, the order of a cost segregation is to start with the land. What is the value of undeveloped land? Allocate that and then the rest is divided among the personal property, land improvements and buildings. It’s also good to separate out and value the various parts of the building. For example, what is the value of the roof? If/when you replace the roof, you can take a write-off for the undepreciated portion.
Land. Land is non-depreciable.
Generally, the strategy of a cost segregation study is to allow you to accelerate depreciation. If you have something that is $25,000 and you have a choice of depreciating it over 5 years or 27.5 years (residential), it makes sense to want to depreciate it for 5 years.
There is one caveat. It all depends on whether extra depreciation creates a loss on your tax return and whether you can deduct that loss against other income.
Additionally, if your plan is to sell the property for a gain soon, you also have to weigh in the cost of recapturing the depreciation. It’s possible that you could actually pay more tax by creating additional depreciation that needs to be recaptured at a higher tax rate than the capital gains tax rate would be on the sale.
Those were the considerations before the Tax Cuts and Jobs Act (Trump Tax Plan). And they were definitely valid concerns that needed to be weighed. Now we have a couple of other considerations added because of the Trump Tax Plan:
- Personal property with less than 10 years of depreciable life will be added to UBIA (unallocated basis immediately upon acquisition). If your taxable income is over the income threshold, $315K/married, filing jointly or $157.5K/single you’re subject to the wage limitation rule, this is a big deal if. If your taxable income is less than the income threshold, it’s not as big of a deal
- The accelerated depreciation from personal property could drop your income to below the income threshold, giving your business and other real estate access to the 20% income deduction.
We just covered, in bullet form, over a dozen pages of the Home Study Course, The Cost Segregation Guidebook. That’s just part of the course, but probably the most important part. Before you jump into the “how to” for any strategy, make sure it’s the right strategy for you. And one more thing, is the timing right for you? A cost segregation might be an awesome idea but the WHEN is just as important as the WHY.
We cover that and more in the Home Study Course this week, The Cost Segregation Guidebook. There is only one way to get the course now and that’s by enrolling in coaching. Coaching is $99 per month and gives you two Home Study Courses a month, live twice monthly coaching sessions and Pop-Up calls with new tax issues and strategies.
Or, you can wait a few months and pick up the Home Study Course for $149 at USTaxAid.com.
I make more money if you wait, sure, but I want to make sure you know the cost of waiting. To join coaching, go to https://www.ustaxaid.com/coaching-program/.