When it comes to commercial real estate, one of the most crucial aspects of managing the asset is accounting for the costs associated with it. In particular, cost segregation is an accounting strategy that separates assets into various categories with different depreciation periods. This strategy enables commercial real estate owners to identify and maximize depreciation deductions, resulting in significant tax savings. In this paper, we will discuss cost-segregated accounting in commercial real estate assets, including what they are, how to determine if you need one, and the benefits of using them.
What is Cost Segregation Accounting?
Cost segregation accounting is a tax strategy that involves breaking down the costs associated with a commercial real estate asset into different categories for tax purposes. These categories include land improvements, building components, personal property, and land, each with a different depreciation period. This strategy enables commercial real estate owners to take advantage of accelerated depreciation, allowing for greater tax savings.
How to Determine if You Need a Cost Segregation Study?
A cost segregation study should be considered if you own or have recently acquired a commercial real estate asset. Factors that may indicate the need for a cost segregation study include:
- Recent acquisition or construction of a commercial property
- The asset has a cost basis greater than $750,000
- The asset generates significant taxable income
- The asset has undergone significant renovations or improvements
Benefits of Cost Segregation Accounting:
Increased Depreciation Deductions: Cost segregation enables commercial real estate owners to identify and maximize depreciation deductions by breaking down assets into various categories with shorter depreciation periods. As a result, the owner can claim greater tax deductions in the short term, resulting in significant tax savings.
Improved Cash Flow: Increased depreciation deductions translate to lower taxable income, resulting in improved cash flow. This improved cash flow can be reinvested into the property or used for other business purposes.
Asset Valuation: Cost segregation provides a detailed breakdown of the costs associated with a commercial real estate asset. This information can be useful in determining the property’s fair market value and in negotiating leases and sales.
Reduced Tax Liability: With increased depreciation deductions, commercial real estate owners can significantly reduce their tax liability, resulting in improved profitability.
Conclusion
Cost-segregated accounting is an important tax strategy that enables commercial real estate owners to maximize depreciation deductions, resulting in significant tax savings. By breaking down assets into various categories with different depreciation periods, commercial real estate owners can improve cash flow, asset valuation, and profitability. If you own or have recently acquired a commercial real estate asset, it is important to consider a cost segregation study to take advantage of these benefits.