Even knowing the benefits of a cost segregation study, it’s still important to know whether such a study would help your particular case this tax season.
Individuals and businesses employ cost segregation studies when they look to recapture an investment’s depreciation more quickly than they otherwise would. For example, commercial buildings take 39 years to depreciate, which means individuals may claim only one-thirty-ninth of the depreciation value as a tax deduction each year. For residential properties, it takes 27.5 years to fully depreciate. But cost segregation studies might be able to get some of that money back sooner.
Cost segregation studies work by individually assessing assets and their depreciation values within a building instead of looking at it as one big investment. People are then able to break out and claim the nonstructural elements of their buildings as a tax deduction more quickly than waiting for the entire building to depreciate. But as appealing as that might sound, it’s not always a good deal for taxpayers.
Cost Segregation Can Be an Expensive Mistake
For starters, a cost segregation study, which can cost between $5,000 to $15,000, is only worth it if there are several items of value inside the property. For example, it would be more beneficial to perform on a doctor’s office, which houses expensive built-in medical equipment, valuable machinery and moldings and fixtures than on a mostly empty warehouse where there aren’t as many assets to separate from the property itself. The items inside a doctor’s office would provide a tax deduction that could justify the cost of the study; an empty warehouse would not.
“A cost segregation study can cost between $5,000 to $15,000.”
Another circumstance where individuals might not want to authorize a cost segregation study is if they have an existing net operating loss. If a business is already losing money, cost segregation will only add to the losses and won’t provide any current tax benefits.
Rental properties are another investment to be wary of when considering whether cost segregation is appropriate for your case.If an investor is planning to own a rental property for the long term, then it might help to conduct a cost segregation study on the property. But if he isn’t sure how long he plans to keep it, or if he knows he plans to sell in a few years, the costs far outweigh the benefits. Short-term owners would not recoup the cost of the study.
Lastly, individuals might not want to consider cost segregation on a passive investment that isn’t earning a taxable profit. By law, you cannot claim a tax deduction on a passive activity unless you have passive income to offset the losses. If an individual were to have a cost segregation study performed on this type of investment, any tax benefit might be delayed until the investment begins to make a profit for the taxpayer.
It’s critical to consult a certified public accountant firm before you decide to go forward with a cost segregation study because the benefits may change from year to year.
LaPorte has CPAs and tax professionals ready to assist you with any questions you have related to cost segregation studies and other tax or accounting concerns.