A tax strategy approved by the IRS in 1997 to reclassify specific real property assets that usually receive a depreciation life of 39 years (commercial real property) or 27.5 (commercial residential) into “tangible personal property” that is treated as five (5) year property or land improvements which are treated as fifteen (15) year property for depreciation purposes. Due to improved treatment, portions of the electrical, plumbing, mechanical systems, and site improvements of a building along with hundreds of other components can be allocated into shorter lives translating into immediate cash flow.
“Cost Segregation Studies are a lucrative tax strategy that should be considered in almost every real estate purchase.”
– US Treasury Department
This effectively increases taxpayer’s depreciation expense in today’s dollars. By recouping up to 40% of the building cost over the first 5 years as opposed to depreciating it over 39 years, translates into significant tax savings and taps into the concept of the “time value of money”.
Cost segregation studies are one of the most valuable tax strategies available to owners of commercial real estate today. This increasingly popular phenomenon, offers facility owners the opportunity to defer taxes, reduce their overall current tax burden, and free up capital by improving their current cash flow. Virtually every taxpayer who owns, constructs, renovates, or acquires a commercial real estate structure stands to benefit from a cost segregation study.