Cost Segregation is one of the big words use by tax gurus and tax strategists to potentially make you pay less taxes. Cost segregation is simply accelerating depreciation on real estate assets that are usually subject to 27.5 residential and 39 commercial to some items (parts of the building) at 5, 7 or 15 years depreciation using either bonus depreciation or section 179. For example, multifamily properties around 20% to 35% of assets might be accelerated.
It is important to mention that you are just accelerating the depreciation but you are not getting any additional deductions from the cost of the asset.
To get full advantage of the cost segregation, your net loss might be applicable due to material activity (i.e. example spouse doing Real estate professionally). If you are limited due to passive loss rules, it might not be a good option to have the additional expense and no tax benefit. Also, if you are going to later on sell the property in the short term, then, it might not make much sense due to the recapture at ordinary income rates (a 1031 exchange might be an optimal strategy to avoid the recapture).
The IRS has publication 5653 that in over two hundred pages (268 to be exact) provides great detail on the history of depreciation (did you know that in 1913 the taxpayer were given freedom to determine depreciation allowances?), methods of cost segregation – a) engineering based and b) non engineering based, and many other relevant sections.
As you can imagine, the cost segregation analysis might be beneficial in certain cases. However, specific details on your case are required before making a determination. Reach out to our CPAs to know if might be a good option to reduce your tax burden.
Link IRS Publication 5653 – Cost Segregation Audit Technique Guide
