Updated: Oct 3, 2020
Engineering based Cost Segregation Studies permit commercial real estate owners to reclassify real property for depreciation purposes as more rapidly depreciating personal property. This classification results in significant cash flow benefits in both present and future years through considerably shorter depreciable tax life and accelerated depreciation methods.
This methodology maximizes benefits and assures that IRS guidelines are followed.
"Cost Segregation Studies are a lucrative tax strategy that should be considered in almost every real estate purchase" - U.S. Treasury
With the exciting change brought about by the CARES Act, Cost Seg is a more attractive option for clients than ever before. Several notable changes include Bonus Depreciation available for select components, as well as the expanded time frame in which a client can recapture taxes paid in previous years (not extended to five open years).
Cost Segregation is a Tax Deduction that creates a dollar for dollar tax reduction. As with any deduction, it reduces the amount of income that a client shows as profit, and therefore pays taxes on. Clients by in large had hugely profitable 2019 tax years and paid in accordingly. Thus, a large deduction by performing a Cost Seg study could wipe out most if not all taxation for their 2020 tax year. Considering the vast majority of clients have already pre-paid in heavily based on projected profits, this study instantly frees up the cash flow of all of the money pre-paid in, as well as money they are about to pay in.
Also, with the new changes, any additional benefit may be used by the client either in the future, or carried back up to five open years. Thus allowing the client to potentially recapture taxes paid in previous years.
Decisions on how to take the Cost Seg benefit is case by case and come from several factors. These include the entity type, how many partners there are, are they passive or active, how much have they paid in pre-paid taxes for 2019 tax year, what is their future tax liability, and most importantly: what are their overall goals for this project.
All of this should be discussed on the Discovery Call, and the follow-up calls we would perform with the client.
But the first step is running Presentation Pro and booking a Discovery Call so we can determine how much is available for the client before we can determine the best way to take the benefit.