What is cost segregation? In a nutshell it’s the process by which an investor can increase the amount of total depreciation taken on each investment property. It will deal almost exclusively with the personal property which is part of the real estate. These personal property assets include a building’s non-structural elements, exterior land improvements and indirect construction costs. This is usually the point at which investors begin to glaze over.
Not so fast write-off breath.
Once you fully understand the results of successful cost segregation, you’ll be a fan for life. The difference between what the average investor claims for depreciation and what’s actually available is staggering to most when they see it for the first time. If you want to try it out on your own, go here. I strongly recommend though, that you hire a firm specializing in this process, as the IRS much prefers that approach.
What’s the average? In my experience and in talking with various CPA’s over the years, the average taxpayer claims the normal building depreciation using the schedules requiring a 27.5 or 39 year life. Many will then add a few personal assets to the mix, but not nearly what is available to them.
Take a $500K purchase of residential income property.
Let’s say it was built a couple years ago, and you can support a land value of $100K. This results in the building being depreciated at $14,500 a year. Investors then will add a few items of personal property, depreciated over five years. Let’s say the average runs around $5.5K. They now have $20K in depreciation. At the blended tax rate of 33% state/fed, this results in a tax savings of just under $6,700.
However, if this investor takes advantage of cost segregation, his depreciation could increase dramatically. Typically, the engineers will literally look at every single part of your property. This includes but isn’t limited to driveways, landscaping, exterior stairs, HVAC systems, and on and on. It’s common for them to find roughly 6-20% of the purchase price, including land, in new depreciation. (They often find much more than that.) Using this example that would mean give Read more
work for them. I
This week’s Odysseus Medal goes to Matt Carter of Inman News for his four-part series on real estate weblogging.
Let’s all agree on the following:
Most of the national real estate sales trainers training today are selling worthless crap. Want proof? Buy their stuff and see if you can apply any of it and actually make your business better.