Depreciation Life Can Be Shortened on Commercial Property Using Cost Segregation

Thinking about buying commercial property? Are you familiar with cost segregation? A cost segregation study could be very beneficial to your bottom line. Cost segregation is a popular, yet little known technique which provides buyers of commercial property with tremendous tax benefits. How? By reclassifying components and improvements on a commercial building from real property to personal property. Why is this so useful? Because it permits the owner to accelerate their depreciation from the typical 27.5 to 39 years to a 5, 7, or 15 year depreciation schedule. You can see the potential for reduced taxes and improved cash flow. So how does it work? First, does your property qualify? The answer is yes if you purchased, constructed, or improved the property after January 1, 1986. You must also anticipate holding the property for at least a few years. If your property qualifies, you will need to perform a cost segregation engineering study. It is best to have a study completed for the year the building or improvements are put into service. However, the IRS does permit taxpayers to catch up on unclaimed depreciation that was not claimed from day one. In order to complete a study, a cost segregation study will probably need the following: 1) your current tax schedule 2) building cost information 3) Change orders. Once the study is complete (expect 4-6 weeks), your CPA will be able to file the necessary schedules to accelerate your depreciation. That is the basics. Discuss cost segregation with your CPA and look for a qualified company to provide the cost segregation study. Depending on the results, you could see thousands of dollars in tax savings.