Cost segregation is a strategic tax planning tool that allows investors in real estate to maximize their depreciation deductions.
Residential real estate is depreciated over 27.5 years, but cost segregation allows owners to accelerate depreciation on personal property and land improvements, which have shorter timelines of 5, 7, or 15 years. Items like cabinets and countertops, and land improvements such as parking lots and landscaping, can depreciate faster, offering significant upfront tax deductions that reduce taxable income and free up funds for owners.
Example: Traditional Depreciation vs. Cost Segregation for a $1,000,000 Apartment Complex Purchase
Traditional Depreciation (27.5 Years):
- Building: $950,000 / 27.5 = $34,545 per year
- Land: $50,000 = $0 per year (Land is not depreciable)
- Total: $34,545 per year
Cost Segregation (Accelerated Depreciation):
- Building (27.5 years): $700,000 / 27.5 = $25,455 per year
- Land: $50,000 = $0 per year (Land is not depreciable)
- Land Improvements (15 years): $150,000 / 15 = $10,000 per year
- Personal Property (5 years): $100,000 / 5 = $20,000 per year
- Total: $55,455 per year
Using cost segregation, the owner in this example would claim an additional $20,910 in depreciation in the first year, boosting cash flow and tax savings. While cost segregation studies cost $5,000 to $15,000, the benefit almost always outweighs the expense. A study can be done at any time during ownership, allowing for “catch-up” depreciation.
For Spokane County apartment owners, cost segregation offers significant savings and reinvestment potential, making it a smart long-term strategy. Contact me for resources on conducting a cost segregation study!
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Jordan Lester, CCIM, MBA specializes in advising clients with the acquisition and disposition of multifamily investment properties. With a primary focus in Spokane County and an expert understanding of the latest market trends, Jordan is committed to maximizing his client’s financial goals to achieve their real estate objectives. To get in touch with Jordan, email jordan.lester@svn.com or call 509.496.6922