reduce income taxes for commercial property ownersAlmost everyone understands that depreciation helps increase cash flow by reducing reportable income.  What if there was a way to “turbocharge” your depreciation and dramatically enhance your bottom line???

Active real estate investors can legitimately increase depreciation, and thereby significantly enhance cash flow, through the use of a quality cost segregation study.  An intelligently executed and properly prepared cost segregation study can provide real estate owners with an IRS-sanctioned cash windfall.  Cost segregation studies identify short-life depreciable components, categorizing them as 5-Year, 7-Year or 15-Year depreciable life assets, and allows for not only the shorter depreciation life, but accelerated depreciation via the use of a 200% declining balance for the 5 and 7-Year components, and a 150% declining balance  for the 15-Year components.  The result is significantly increased depreciation in the early years of asset ownership, offsetting much of the income derived from the property.

Short-life depreciable components are plentiful on most properties and can represent from 20% to 40% of the total cost of the asset.  Here is a short list of examples of each short-life category:

  • 5-Year: carpeting; vinyl tile; window coverings
  • 7-Year: kiosk/cluster style mailboxes; park benches
  • 15-Year: landscaping; parking lots; sidewalks

One of our clients recently asked us to perform a cost segregation study on a newly acquired multifamily asset.  Working with their depreciable basis of just under $20,000,000, we identified over 38% of the basis as short-life depreciable components, generating almost $1,000,000 in additional depreciation and more than $385,000 in potential tax savings in the first year of study use.  Over the first five years, those potential tax savings may top $1,600,000!  That is money that can be rolled back into the property for improvements, distributed to partners, or utilized as seed money for the next purchaseRedirection.

Correctly identifying, valuing, and documenting the short-life components is critical for a quality cost segregation study.  The IRS, in their IRS Field Audit Techniques Guide, publishes checklists for a quality study and a quality cost segregation report.  As long as the study complies in all areas with the IRS guidelines, it can be used to legitimately increase your depreciation and reduce your taxes, thereby enhancing your cash flow and bottom line!