Owning residential rental or commercial investment property comes with a substantial tax benefit: depreciation. This deduction doesn't require extra spending but is typically slow - 27.5 years for residential properties and 39 years for commercial ones.
Accelerate Your Depreciation with Cost Segregation
Cost Segregation is a strategy that allows property owners to accelerate their depreciation deductions, especially in the early years of ownership. this involves separately depreciating non-real property elements, such as:
Land Improvements: Landscaping, swimming pools, paved parking areas. and fences.
Personal Property: Items inside the building that are not part of the structure, like refrigerators, stoves, dishwashers, and carpeting in residential rentals.
Benefits of Cost Segregation
While cost segregation doesn't increase our total depreciation deductions, it accelerates them. Personal property can depreciate over 5-7 years and land improvements over 15 years. This means more substantial deductions in the first few years. By utilizing bonus depreciation or Section 179 expensing, you can deduct most or all of the cost of personal property and land improvements in the first year of ownership.
How to Implement Cost Segregation
To take advantage of cost segregation, a study must be conducted to identify which building elements qualify as personal property or land improvements and determine their depreciable basis. These studies can be performed by engineers or through less expensive methods, although the latter might be seen as less reliable by the IRS.
Considerations
Cost segregation may not be suitable for every property owner. For instance, it might not be advisable if it results in a loss that can't be deducted due to passive loss rules or if the owner plans to sell the property soon, as this would require recapturing the cost-segregated deprecation as ordinary income.
Optimal Timing
The best time to perform a cost segregation study is the same year you buy, build, or remodel your property. However, you can also wait until a future year when you have enough rental or other passive income to benefit from the accelerate depreciation deductions.
Unlock the full potential of your property investments with cost segregation. At Albrite Financial Group, we provide expert guidance to help you maximize your tax benefits. Contact us today to learn more and get started on optimizing your property’s depreciation.
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