A cost segregation study stands as the gateway to unlocking real estate savings, allowing taxpayers who have constructed, purchased, or remodeled real property to accelerate depreciation deductions, thereby reducing taxable income and tax liability. This is accomplished by identifying the assets that can be depreciated using the shorter depreciation lives that are eligible for bonus depreciation that, absent the cost segregation study, would be depreciated using much longer life of 27.5 years for residential real property or 39 years for nonresidential real property.
How does a cost segregation study interplay with bonus depreciation?
Assets that are assigned to bonus depreciation asset classes are eligible to take bonus depreciation. This is significant in today’s landscape, where taxpayers can utilize 80% bonus depreciation for assets placed in service in 2023 and 60% bonus depreciation for assets placed in service in 2024. Any assets identified as 5, 7, and 15 year property during the cost segregation study are eligible for bonus depreciation, while residential and commercial real property is not eligible.
How long does a study take?
Cost segregation studies typically take six weeks to complete. Studies require a qualified engineer to perform a site visit in order to categorize and document different asset classes. For any taxpayers that are considering cost segregation study on their property, we recommend starting the process as early as possible to allow enough time to complete the study and incorporate it in the tax return.
When should I get a cost segregation study?
Ideally, a cost segregation study is performed in the year of the acquisition, construction, or renovation of a property. Property owners can also have look-back studies where cost segregation is performed on buildings built, acquired, or renovated within the past 10 years. In such cases, the owners will have to file change of accounting method forms to allow them to catch up on any accelerated depreciation that may have been missed in previous years, without having to amend prior year tax returns.
How can we help?
GBQ will connect you with a cost segregation expert who can help. Please contact Jeff Waldeck directly with any questions.
