Purchasing or investing in real estate can be quite expensive. However, cost segregation helps real estate investors (both single & multi-family real estate investors) boost their cash flow. This is especially when purchasing or upgrading their real estate properties.

What is Cost Segregation? 

Cost segregation is a way for real estate investors to more quickly deduct the depreciation of a property against their taxable income. In other words, it’s a tax strategy to speed up depreciation and lower tax owed.

Benefits of cost segregation

1. Reducing the taxes you pay on your investment properties each year
2. Accelerating the depreciation you can claim on your investment properties. Instead of depreciating the whole property over 27 or 39 years, you get to claim deductions for certain systems in the property over 5-15 years.
3. Get more money for investing after paying your taxes.

How cost segregation works

Important to note is that cost segregation isn’t available for your primary residence. This approach extends beyond commercial properties. You can also apply it to residential properties you own as investments, including single or multi-family properties However, it doesn’t apply to properties you inhabit as your primary residence.

Real estate accountants and engineers conduct a cost segregation study. They assess the property and segregate its components, such as plumbing, electrical, and carpeting, along with other interior and exterior elements that qualify for 5 to 15-year depreciation. Each component follows its distinct depreciation schedule instead of the property’s overall schedule.

Now, you can do the study by  yourself, but it is highly recommended to use professionals such as real estate accountants and engineers. Why?  Because you want to squeeze the greatest amount of tax savings from this tax saving strategy

The study involves; 

1. Complete A Feasibility Analysis – analyze your investment property to make sure it is a good candidate for cost segregation. They achieve this by examining all property components, encompassing plumbing, roofing, and electrical systems, among other materials.
2. Gather All Necessary Information
3. Analyze The Property- identify any operating costs of your investment property that you can depreciate over either 5, 7 or 15 years
4. Complete A Report – When everything is completed, a report is prepared. You can use this to determine how much you can save on your income taxes using the strategy.

You can perform a cost segregation study whenever you purchase, construct, or renovate a property. However, the best time to do it is within the same year of construction, purchase or remodeling as it gives you the most savings.

As a real estate investor, you cannot afford to not have a tax saving strategy. Cost segregation is one of the strategies that can save you on the taxes you pay year. At Gold Accounting Tax, we help single & multi-family real estate investors maximize their profits while minimizing their tax liability through tax strategies so that they can scale and grow their portfolio with peace of mind. Give us a call.