Investing in commercial property can provide significant returns. What most commercial property owners don’t realize are the significant tax benefits associated with owning commercial property. For years, large commercial property owners have used Cost Segregation to increase cash flow and grow their businesses. This same method of deduction is now available to owners of buildings from $250,000 and up.
Cost segregation is the method of re-classifying components and improvements of a commercial building from real property to personal property. The process allows the assets to be depreciated on a 5, 7 or 15-year life instead of the traditional 27.5 or 39-year life of real property. The result is the current taxable income is reduced and cash flow increased.
The results of this engineering-based study accelerate depreciation and reduce the amount of taxes owed for commercial property owners. Owners often use this cash to reinvest in their business, purchase property, pay down debt or apply to principal payments.
To take advantage of Cost Segregation, an engineering-based study needs to be conducted on the property. This study identifies building components and accelerates the depreciation of tangible personal property into shorter depreciation categories, such as, 5-, 7- and 15-year rather than conventional 27.5- and 39- year schedules. Five- and seven-year items might include decorative building elements, electrical for dedicated manufacturing, medical equipment and specialty flooring and finishes. Fifteen-year items might include signage, parking lot striping, site utilities, landscaping and paving.
An engineering-based cost segregation study results in a much higher depreciation expense and significantly reduced taxable income for the property owners. Best of all, cost segregation can be applied to buildings purchased or built since 1986, including renovations with – with no need to amend tax returns.
A Cost Segregation Study should take six to eight weeks to complete and will come ready for your tax professional to plug into your tax return.
Fifteen years ago, when Cost Segregation was introduced to the marketplace, studies were performed only on very large multi-million dollar buildings for companies with deep pockets due to the multiple site visits and specialists needed to lend their expertise for the study. As technology has advanced, the engineering-based cost segregation study has become affordable for all commercial property owners.
The Return-On-Investment is very compelling, allowing commercial property owners to free up investment capital to grow their businesses using their own money.
With a tax depreciation schedule, a preliminary analysis of a commercial building can be conducted to let the owner know the potential savings.