Cost Segregation A Secret to Saving a Ton on Taxes

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I'd like to tell you about one of the best kept secrets of the IRS. It is called Cost Segregation. But your probably wondering what it is.

Cost segregation relates to depreciation of commercial buildings. Normally, a commercial building is depreciated over 39 years. What cost segregation does is take the whole building and it breaks the building up into various parts that can be depreciated between 7 to 15 years. For example, the carpet and flooring in a commercial building wears out before 39 years, so we can depreciate it in much fewer years. The benefit from this is you get a huge tax break. Instead of taking a small deprecation deduction over 39 years you take a large deduction over 7 to 15 years. There are parts of the building that will still be deprecated over 39 years, but you will get a much higher depreciation deduction the first 7 to 15 years. You can start cost segregating your building even if you have owned for several years.

There is one potential drawback from cost segregation. That is if you decide to the sale the commercial building, it can cause a taxable event in where you will have to recapture the deprecation from previous years as income. You can avoid this or at least prepare for it by making sure you are proactive in your tax planning and consulting with your accountant.

Here is an example of the savings that you can have if you use this method of depreciation. One of our clients bought a rather large commercial office building. He put down a large down payment to purchase it. Since the down payment on real estate is not tax deductible and since a commercial property is typically depreciated over 39 years, his tax deduction was rather small, and he had a large tax liability for that year. We suggested doing a cost segregation. What this entailed was hiring an engineer and grouping the cost of the various parts of the building together. Then it was possible to depreciate the building over fewer years thereby being able to take a bigger deduction the first years of owning the building. In the end, doing a cost segregation saved our client $20,000 in taxes.