Cost segregation is a study that allows owners to depreciate personal property and land improvements faster than the real property.
Depreciation is an accounting method used to allocate the cost of a physical asset over its useful life, which allows owners to reduce their annual taxable income.
Commercial real estate buildings are depreciated on a straight line basis over 39 years, while residential real estate buildings are depreciated over 27.5 years. While apartment buildings are considered commercial real estate buildings, they fall into the residential category of depreciation and are depreciated over 27.5 years.
Deprecation is a major benefit to owning commercial real estate!
While real property is depreciated over either 39 years or 27.5 years, land improvements can be depreciated over 15 years, and personal property can be depreciated over 5 or 7 years. This can allow investors to increase their cash flow and maximize their deductions.
Examples of real property include steel structures, roofs, and windows. Examples of land improvements include parking lots, curbs, and landscaping. Personal property is defined as a property that can be removed without any damage to the building structure. Examples of personal property include carpet, countertops, and cabinetry.
Case Study #1
Accountants can assist with a cost segregation study, but there are also companies whose sole focus is to perform cost segregation studies for commercial properties. It is important to note that not all cost segregation companies are equal.
One of our clients used his accountant to complete his cost segregation study. He was initially satisfied with the tax savings that he realized. A short time later he had a professional cost segregation company review his study. He was shocked that the company found an additional $120,000 in tax savings. For him, this meant $120,000 in actual tax savings.
Case Study #2
Cost segregation studies can be extremely beneficial to property owners, and can increase their initial cash flow.
Another client who owns a portfolio of small multifamily properties in Spokane has done cost segregation studies on all of his properties. This has not only saved the client tons of money in taxes, but has also freed up money for the client to buy other investment properties and continue expanding his portfolio.
We have relationships with excellent Cost Segregation companies, and would be happy to refer any prospective clients to help you achieve your financial goals!
SVN Cornerstone Multifamily Team
Nate Gant is an Advisor with SVN Cornerstone. Nate has been an active member of the Eastern Washington real estate community since 2010. He has brokered more than $100 Million in real estate transactions, specializing in land development, REO and investment properties. To get in touch with Nate, email nate.gant@svn.com or call 509.993.4440.
Jordan Lester is an Associate Advisor with SVN Cornerstone. Jordan served as a brokers assistant for 3 years with SVN Cornerstone before becoming a full time broker. Jordan specializes in the multifamily sector of commercial real estate. To get in touch with Jordan, email jordan.lester@svn.com or call 509.496.6922