First of all, let’s start with what a cost segregation study actually is.
A real estate property is generally comprised of 3 components: land, personal property and real property. Land is not depreciable. Real property (the building shell) is depreciated over 27.5 years if it’s residential property and 39 years if it’s non-residential property. Most of the time all the personal property is also lumped together with the real property value and the total is then depreciated over 27.5 or 39 years.
Another option is to perform a cost segregation study. There are companies that can do that for you at a cost starting at about $5,000. If you have some real estate, construction or like experience and can follow a template, you can also perform your own cost segregation study. It’s generally not recommended that you personally prepare your own cost segregation study on a large commercial project, but you can certainly do that for a single family or a small multi-family home.
The cost segregation study will assign values for the personal property. The lives for the various personal property elements will be 5 years – 18 years. Since these lives are shorter than the standard 27.5 or 39 years, there is faster depreciation.
After you’ve done the cost segregation study, you can either just begin with the new lives or you can catch-up depreciation. This is all part of your strategic use of depreciation with your real estate.
Prior to the 2018 Act, the biggest question was “How much real estate loss can you deduct?”
The 2018 Act has added a few new wrinkles that must be considered before you move forward with your depreciation strategy. Strategy is everything! More info in tomorrow’s blog.
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