A COSTLY MISTAKE FOR RENTAL OWNERS: OVERLOOKING COST SEGREGATION

Most rental owners have not taken advantage of one of the best things the government has ever provided to rental owners – cost segregation. That’s simply because they weren’t informed.

Q: What is cost segregation?

A:

It is an IRS-approved method of accelerating your depreciation and yields approximately $50,000 to $80,000 in cash per million dollars of building value.

Instead of depreciating your property as one unit over 27.5 years (or 39 years for commercial non residential property), cost segregation breaks down your property into its parts and pieces.

To put it into perspective, look at it like a Big Mac. When asked, most people would identify it as a hamburger. Not McDonald’s. To them it is “Two All Beef Patties, Special Sauce, Lettuce, Cheese, Pickles, Onions on a Sesame Seed Bun.” A cost segregation study does the same thing to your building. It separates its components, i.e., the flooring, wallpaper, crown molding/trim, cabinets, counter tops, landscaping, etc.

If you purchased or built a building after September 27, 2017, when the Tax Cuts and Jobs Act came into existence, you are allowed 100% bonus depreciation until January 1, 2023, when it drops to an 80% deduction on any identified personal property assets.

It drops by 20% per year until “bonus” depreciation is gone and it goes back to the original benefits of doing a cost segregation study. So, don’t miss out on using cost segregation on the extra cash benefits.

Assets that can be affected include hundreds of items and represent somewhere between 20-40% of your building that can be expensed, thereby reducing your taxable income.

Q: Shouldn’t my CPA do this?

A:

This is a separate function; cost segregation specialists are not accountants. Cost segregation specialists perform engineering-based studies and work hand in hand with your CPA/ER. When the study is complete, the cost segregation specialist hands off a one-line 481a adjustment for incorporation into your tax filing and should coordinate it with your CPA/ER.

Some tax professionals provide an “accounting study,” which usually only includes obvious items, like rugs and landscaping, whereas cost segregation specialists review hundreds of items including parking lot striping, wallpaper, specialty plumbing and wiring, etc.

Most tax professionals don’t have the expertise to conduct a comprehensive cost segregation study. Their job is to apply thousands of pages of tax code. Cost segregation experts only focus on one aspect of the tax code – cost segregation. They prepare an engineering-based study, which the IRS calls the “certain” method.

Q: Is the cost worth it?

A:

A good cost segregation firm prices each project individually, and it is based on the type of building and the complexity of the project. It is not a cookie cutter one price fits all process. The return on investment typically falls between 10:1 and 20:1.

Before you decide to start the cost segregation study, you will be provided with a return-on investment estimate. A company such as Cost Segregation Services, LLC (CSSI) can provide you with a complimentary analysis, a Net Present Value Schedule, and other materials to help you determine your value in doing a study. It has to be right for you!

A cost segregation study taps into the time value of money because you’re able to depreciate your property faster and take advantage of tax deductions now versus in the future.

QUESTIONS TO ILLUSTRATE THE TIME VALUE OF MONEY:

• If you won the lottery, would you take the payout today or spread it out over 27.5 or 39 years?

• Will you be alive 40 years from now to use future deductions?

• What will your dollar be worth in the future, given inflation? 75¢, 50¢? Isn’t it better to get to use the full value now?

Q: How do I know if my property qualifies for a cost segregation study?

A:

The following requirements must be met for a cost segregation study:

✓ It must be a property that was purchased, constructed, or remodeled/renovated after ’86.

✓ The property’s cost basis must be over $250,000 (renovations $100,000).

✓ It must be a property owned by a for-profit entity (not charities, churches, etc.).

✓ You must have a tax liability or there is no benefit.

The choice can be amazingly simple: keep your money or send it to the IRS. However, you need facts to judge the value of doing a study. CSSI’s predictive analysis will give you those facts so you can weigh your options and do whatever you think is best. You’re a savvy investor and you owe it to yourself to find out how much money is available to you.

TONY BONIFACIC, National Account Representative Cost Segregation Services (800) 344-7671 mq@costsegserve.com

As a former accountant Tony has been involved as a financial manager, sales manager, administrator, accounts receivable consultant, and trainer for thousands of clients. He has saved millions for his clients including everyone from mom and pops to NYSE companies. In 2007 he began promoting cost segregation to his clients and new contacts. Today he devotes all his time and his representatives’ time to cost segregation.

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