Real estate professionals can also use cost segregation as a way to defer taxes through accelerated depreciation. While it appears
simple on the surface, there is actually a lot going on behind the scenes.
At its core, a cost segregation study boils down to a timing play. You’ll have the ability to shorten depreciable lives as long as it is
permissible. For example, you can move depreciable lives for assets from a 39.5-year life to a shorter time frame. You can increase the value of your deductions and get the quickest depreciation possible and the best possible expense treatment. Essentially, you can get a higher return on investment on the capital if you can write if off faster.
Overall, several main benefits exist for cost segregation, including:
• A rapid uptick in cash flow – The faster you can get a write-off, the better your return on investment will be. Due to the
ability of cost segregation to shorten depreciable lives, you can defer taxes you might have currently paid.
• A decrease in your existing tax liability – Cost segregation allows you to identify the costs of certain assets and reclassify
them in a more favorable status. In many cases, this will lead to a decrease in overall tax liability by taking ordinary
deductions now and paying capital gains later.
• The ability to defer taxes – Similar to how cost segregation can affect your existing tax liability, this in-depth analysis of your
assets and costs may highlight opportunities to defer taxes, allowing capital to grow unimpeded and granting you more
control of your assets.
• Reclaim past depreciation deductions – You may also have the option to reclaim missed past depreciation deductions without
amending prior tax returns. In some scenarios, you may have misidentified assets, thus missing out on depreciation. Using
cost segregation, you can catch these omissions.
If one of your projects has a total cost of $1 million or more, you should strongly consider cost segregation. Ideally, start this process
in pre-construction. Analyze unique features of development, down to the smallest detail. These can include parking lots, reinforced
floors, loading docks and many more.