Cost Segregation Benefits

By Peter A. Elwell, CFA | June 14, 2021

Last week we introduced you to Cost Segregation and how it works. Today we’ll discuss the benefits of Cost Segregation Studies and how some investors pair them with a tax-deferred 1031 exchange. Let’s begin with the eligibility requirements of property for Cost Segregation Studies.

Eligibility for Cost Segregation

Real property eligible for Cost Segregation includes buildings purchased, constructed, expanded, or remodeled since January 1, 1987. In general, property with depreciable costs of $750,000 or more could benefit from a cost segregation study.

What Are the Benefits of Cost Segregation

A few of the main benefits of a Cost Segregation Study could include:

  • Maximize tax savings
  • Capture retroactive savings (unrecognized depreciation)
  • Increased cash flow


Tax Reform Impact on Cost Segregation

What many real estate investors may not know is that the 2018 Tax Reform changed the way Cost Segregation works. Now, rather than having several different categories of property being depreciated at different rates, all short life assets can be written off in a single year, and those losses carried forward if unused. What this means is that a Cost Segregation Study just got a whole lot more valuable! Now, you can get a significant write off right away, or choose to shelter your properties cash flow for years. What is more, if this type of accelerated depreciation schedule is not your cup of tea, you can choose to opt for a traditional depreciation schedule. The choice is entirely up to you and your CPA.

1031 Exchanges & Cost Segregations

Due to depreciation recapture, Cost Segregation may not be advantageous for those who plan on holding the property for three years or less. However, if a proper 1031 Exchange strategy is in place, all gains and depreciation recapture can be deferred, and the advantages of both of these tax strategies can be achieved. In this case, Cost Segregation Studies would have to be performed on replacement properties to avoid future tax.

Call us today to learn more about how a Cost Segregation paired with tax-deferred 1031 Exchange could benefit you. – (844) 533-1031

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