Let’s pretend that it is tax season – depending on when you’re reading this, it might be. As April 15th approaches, you’re desperately searching through your finances, looking for deductions that can reduce your tax liability. Now, you probably think that you looked everywhere and explored every option. However, there’s one you might’ve missed: cost segregation.
A Cost Segregation study involves classifying property components that can be identified as personal property in order to lower your tax bill. Sound simple enough? Well, there’s a little bit more to it. What we’re going to do today is walk you through the cost segregation process while listing off the factors that would make you eligible.
Shorter Depreciation = Lower Taxes
As you may know, any property that you or your business owns is slowly depreciating in value over time. With this depreciation comes another expense – something that can be written off as a tax deduction. However, because depreciation of the property occurs over the course of 30 to 40 years, the expense is fairly low. This is where cost segregation comes in.
What cost segregation does is speed up the depreciation process by identifying assets that would typically belong to the property as personal assets themselves, with much shorter lengths of depreciation. For example, assets like carpeting and wall covering have a depreciation length of five to ten years compared to 30. This allows you to write off larger depreciation expenses to lower your tax liability.
How Is This Done?
Now that you know what cost segregation is, how do you go about it? Well, it’s a study like I said. That means a cost segregation specialist will come in to analyze various aspects of your property including plumbing, electrical, flooring, and walls just to name a few.
They will also assess improvements to the land surrounding your property like sidewalks and landscaping as well. Based on this assessment, the cost segregation specialist will determine which personal property assets can be reclassified for accelerated depreciation. This will increase the depreciation expense, allowing for a larger deduction come tax time.
What Are The Benefits?
As previously stated, cost segregation benefits the property owner in the form of a lower tax liability. In addition to this, cost segregation is also great for estate planning. This can create tax benefit opportunities well after you’re no longer around, which makes payments easier for whoever you decide to leave your estate to.
Being audited by the IRS? Fortunately, cost segregation documentation leaves a clean paper trail for the IRS, potentially simplifying matters in the future. Last and definitely not least is an increased cash flow. The lower the tax liability, the more money you save, meaning that you can apply it to other aspects of your home or business.