If you’re thinking about buying a building or are in the early stages of construction for a new property, now is the time to think about having a cost segregation study performed. By doing so, you will benefit from immediate tax savings and increased cash flow.
Let’s say you are playing the lottery, and you win a million dollars. Would you choose to have a little bit of that money every year for the next 39 years, or would you choose to get the majority of your funds upfront? When considering the time value of money, it’s a no-brainer to choose to have the bulk of it in your pocket right now. This is essentially what a cost segregation study can do for you.
Cost segregation is an important and complex tax planning strategy. Read more to understand what it is and how it can help you pocket more cash.
Cost Segregation: The Hidden Tax Benefit
What is a cost segregation study?
A cost segregation study is a detailed tax analysis that enables property owners to accelerate the depreciation of certain tangible property using a shorter depreciation life. In short, it allows higher deductions over a shorter period of time. With this comes many benefits, such as increased cash flow and reduced taxable income.
How can a cost seg study benefit you?
Most real estate owners are aware that when they buy or build, there are depreciation benefits, but there is much more to it. It’s uncommon for a building’s entire cost to be depreciated over the 39-year or 27.5-year life assigned to real property. So when you classify a property’s full purchase price, renovation expenses, or construction cost as such, you miss out on significant tax savings.
The benefits of a cost segregation study allow you to take it at a much more granular level. It says that this isn’t just a building. Think about things such as electricity, plumbing, fences, and paved parking areas that have been included in your building’s cost. These all have substantially shorter depreciation lives (5, 7, and even 15 years). When you look at the individual parts and not just the sum of all parts, you can take advantage of those, and in turn, pocket more cash.
The fundamental principle of a cost seg study is that a dollar today is more valuable than a dollar in the future. Just like our example of winning a million dollars, when you choose to get your money upfront, there are many things you can do with it now to help your business along, such as purchasing new equipment or maybe even another building.
It’s a Science and an Art: Hire an Expert
Considering that the IRS requires an in-depth cost segregation analysis, it’s essential to hire an experienced professional. MGA can help.
Although you can go back and do a study on any building purchased, renovated, or constructed over the past 20 years, you will get the most benefit by performing an analysis before you make any big moves.
So, are you buying or building? That’s typically the first thing you decide. The second thing is to call MGA.
If you’re looking for an expert to help you with cost segregation, let’s talk!