I would like to take this opportunity to describe a very important tax break approved by the IRS for owners of residential rental property and other commercial buildings purchased or constructed after 1986. This tax break is called “cost segregation.” The tax savings can be very substantial and realized immediately. Cost segregation is a strategic tool that allows companies and individuals to increase their cash flow by maximizing depreciation benefits for tax purposes. Specifically, it is an analysis of the capital expenditures or investment made in a residential or commercial property that results in the proper classification of costs between real and personal property for the purpose of determining tax deductions for depreciation.
Most owners of residential rental property depreciate the entire cost of their building over 27.5 years. Owners of other types of buildings, such as offices, retail space, grocery stores, restaurants, warehouses and manufacturing plants often depreciate the entire cost using a 39-year or 31.5-year depreciation period, depending upon the date of acquisition. However, under IRS cost segregation guidelines, a significant portion of a building’s cost can be depreciated over much shorter periods, usually five or seven years! Recent tax law changes provide for additional bonus depreciation deductions of newly acquired personal property in addition to the regular depreciation deduction, which provides an even larger benefit.
The cost segregation rules are complicated, but in brief, they allow a taxpayer to separately depreciate components of a building that are unrelated to its “operation and maintenance” over the shortened depreciation periods. In addition, these depreciation deductions are computed using an accelerated depreciation method, the “200% declining balance method,” which allows costs to be recovered at twice the rate that applies under the “straight-line” method. The slower straight-line method is used to depreciate residential rental property and other types of buildings.
Many types of building components can qualify for the shortened depreciation period and accelerated depreciation method. It would be impossible to list them all, but common examples include molding, millwork and other decorative elements, carpeting, wall coverings, partitions, window treatments, counters, cabinets, shelving, special lighting, specialized machinery and equipment (such as kitchen equipment) and the costs of plumbing and electrical allocable to such equipment. In addition, certain land improvements located outside a building may be depreciated over 15 years. Land improvements include items, such as, landscaping, fences, sidewalks, curbs, parking lots, lighting, utilities, signs, swimming pools, tennis courts and playgrounds. Depending upon the type of building, you can expect to deduct between 10 and 60 percent of its cost over the shortened recovery periods.
For more information contact Henssler Financial 770-429-9166 or experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
