'Cost Segregation' is explained in detail and with examples in the Real Estate edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Cost segregation proves to be a procedure of identifying assets of personal property that commonly become lost or bunched together in the real property asset. Cost segregation involves reclassifying costs of assets to a depreciable life that is the shortest one possible.
This allows owners of real estate to optimize their tax deductions in the depreciation category, which lessens the amount of present income tax due. Any investor who is buying a building, renovating a building, or getting into a construction project can qualify for significant Federal and state tax advantages using cost segregation.
Particular assets that pertain to these types of projects may be eligible for such accelerated depreciation. This translates to you being capable of realizing bigger tax deductions now in a shorter time frame. Advantages in bigger tax deductions now include a less expensive capital cost and greater positive cash flow over the principal several years after a purchase has been made or a project completed. Cost segregation studies help you to find such chances to claim more accelerated tax purpose depreciation. These cost segregation studies show always be performed by well qualified Certified Public Accountants.
Cost segregation is able to reduce the time frame for depreciation significantly via s simple strategy. These studies go through all of the costs involved in a property that are currently being tax depreciated over the usual thirty-nine year time frame. Many of these might be reclassified to far shorter time periods of depreciation, including fifteen years, ten years, seven years, or even only five years. The shorter the time frame of depreciation, the greater the tax deductions will be in this far shorter period of time. Greater amounts of depreciation are realized immediately when this is done properly. In this way, not only are tax savings in the present and coming years maximized, but cash flow is similarly increased.
Cost segregation studies make sense for anyone who is purchasing an already existing building. They are efficient for investors who are putting up a new facility. They similarly help those who are engaging in leasehold improvements to a present building. Finally, they give tremendous advantages to businesses or individuals who are renovating, improving, or expanding a building that already exists. Even older buildings can be cost segregated for better tax deprecation purposes.
Cost segregation should not be confused with simple deprecation analysis. A great deal more is involved than simply taking line items off of construction invoices to classify them. The procedure actually involves a team of professionals who are familiar with tax laws and accounting rules, along with construction and engineering concepts. A CPA will be the center of such a team, since he or she will have to make various building components tangible to quantify them in a way that they can be estimated as costs that work with IRS rules. This team would also feature an engineer, contractor, and possibly architect much of the time.
Between them, these professionals will examine in depth electrical and mechanical plans, working drawings, and even blueprints to break segregate out the electrical, mechanical, and structural parts of the building from other components that are associated with the personal property. Even engineering and architect fees as they pertain to various parts of the project are included as soft costs.