What is Cost Segregation and How Can It Help You?

Filed under: Business Law

Income tax season can be rough on everyone, but it’s particularly complicated for commercial or residential real estate owners. Thanks to a system of complicated procedures, it is possible to classify various real estate holdings according to their most tax-friendly status. For example, reallocating a real property to personal property can allow for substantially shorter depreciation times and therefore an accelerated depreciation method.

We call this cost segregation, and it’s essentially the process of identifying various assets and their costs, and classifying them according to the most beneficial federal income tax status. For example, a commercial building with a 39-year depreciable life, or a residential building with a 27.5-year depreciable life could be reclassified as personal property or a land improvement. Now that asset could boast a 5, 7, or 15-year rate of depreciation.

Using an engineering-based study, a building owner can depreciate that property in the shortest time period allowed by tax laws.

Benefits of a Cost Segregation can include:

  • Reduction in current income tax liability
  • Deferral of taxes
  • Ability to claim missed depreciation deductions from prior years (without having to file amended returns)
  • Immediate boost in cash flow

What’s the catch? In order to perform a cost segregation, the IRS requires that an engineering-based study be performed. The study allows all building components, such as electrical, mechanical, and plumbing systems to be reclassed into shorter-lived asset classes. This lends the CPA the information needed to meet strict regulations and requirements.

Why perform cost segregation? Have you heard the old phrase, “A dollar today is worth more than a dollar tomorrow”? We can apply that same principle to tax deductions. The money you free up from taxes this year, can be applied to other investments.

Virtually all commercial real estate owners can benefit from cost segregation. Give us a call and speak to our real estate attorney, and we can explain more about how this strategy can benefit you.


Leave A Comment or Question
Empowering your real estate and business decisions with accuracy and accountabilityContact Us
Learn More »

Real Estate Law

Real Estate Law

As veteran Southern California real estate attorneys, we protect your transaction and your assets with experienced legal representation.

Already involved in a dispute or situation that requires legal counsel?  Contact us today and let us handle the stressful details.

Learn More »

Business Law

Business Law

Whether you are just getting started and need a business entity formed, or you are well established and require outside general counsel with a contract, Larson & Solecki LLP has the expertise and experience you need.

Our team of business attorneys has seen nearly every situation and can advise you on the proper action, whether in San Diego, Temecula, or throughout Southern California.