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What Is Cost Segregation

What is cost segregation

  • Cost segregation is when a group of engineers come into a building, commercial or residential, typically over $500,000 mark, and do an engineering study to pull apart the different pieces of the building to segregate the costs.
  • When you are looking at a piece of property, each piece of property, if it’s a residential rental normally you would depreciate the entire purchase price over 27 and a half years. If it’s a commercial property you would take that purchase price and depreciate at over 39 years.
  • Each piece of the property may depreciate at different rates, such as how long will the drywall last, how long will the fixtures last, how long will the tile last – all aspects makeup cost segregation.

Hey everyone; it’s Shauna, the Tax Goddess, here with you finally again for Facebook Live. I have missed you guys so, so much. I am back in the office here in Arizona in Scottsdale. Today I was at CCIM. I was doing a lunch and learn to a fantastic group of commercial brokers, commercial agents, those focusing on the commercial industry. One of the topics that we covered was cost segregation. Really what this is, is for anyone who owns real estate. Typically it’s done on properties that are more than $500,000 worth of purchase price. Really what’s happening is you are segregating the costs in the purchase of a building.

Let’s take an example. Let’s take this house, right? So when you are looking at a piece of property, each piece of property, if it’s a residential rental normally you would depreciate the entire purchase price over 27 and a half years. If it’s a commercial property you would take that purchase price and depreciate at over 39 years. When you’re buying a $1 million piece of property, that’s a long time to wait for your depreciation to come across. So what cost segregation does, is takes a group of engineers and they come into a building, commercial or residential, typically over $500,000 mark, and they come into that building and they do an engineering study to pull apart the different pieces of the building.

For example, behind me, we have dry wall. In the ceiling, see if we can get to the ceiling, we have some light fixtures. You know, we have windows, we have doors, we have studs, we have tile and carpet on the floor. So there’s all of these pieces in a building that actually make up the full building. Well, the pieces of the building are not necessarily going to last, depreciation is how long the engineer thinks something’s going to last, they’re not really going to last 39 years. You know, dry wall might be 15 years. The light fixture may be 15 years. The floor may only be seven years. The windows may be seven years.

So this team of engineers comes in, does a study, tells you, breaks down all the different pieces to the building and provides that study to your CPA so that the CPA can provide proper depreciation for each different category of assets. So if that’s three year assets, five year assets, seven year, 15 year, or 39 year, some even may be 20 years. Really, the biggest benefit of these studies is that they allow depreciation to be accelerated much faster into the current year. So if you’ve bought a building, and you can have purchased this building 15 years ago even, the engineers can come in, do the study, and get you a huge chunk of depreciation on your current year’s taxes by working with your CPA to fill out, it’s typically called a 3115, it’s a request for a change in accounting method. You would be able to take all of those historical years that you should have been getting depreciation and lump them all into your current year’s taxes.

For some people, especially if you own that property over $500,000, it can really get you a huge chunk of tax savings. So if you own commercial property, residential property, anything that you’re using with a business purpose that is currently being depreciated and the purchase price is over about $500,000, you know, 450, 425, we can do calculations to determine whether the cost of doing the study is going to be outweighed by the tax savings that you’re going to get by doing a cost segregation study. That cost segregation study can really pull depreciation into the current year, really get you a much better tax write off and really get some big bang for your buck.

So if your CPA has not brought up cost segregation studies and you’re in real estate, commercial or residential, feel free to give us a shout. We’re happy to answer any questions we can. Cost segregation studies are pretty particular, so we will have to hire an engineering firm to do that study. But if it can get you some huge tax benefits in owning property, definitely worthwhile. If you guys have any questions, don’t hesitate to reach out. Shauna The Tax Goddess, you can find us at taxgoddess.com. Definitely like, subscribe, all those other fun things. Feel free to join us every Tuesday, three o’clock Arizona time, for our live Facebook Live, so you can ask any questions. Hope you guys are having a great day, and I’ll see you guys out there. Bye.

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PLEASE NOTE: As of late Aug 2018 there was a proposed law change that would disallow a double deduction for these charitable credits at the federal level for contributions made after Aug 2018. You are still eligible for the AZ state tax credits as the change would only impact your ability to take them as charity donations at the federal level.
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