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Today we have JP Komorny with us to speak about cost segregation. JP has been in the accounting industry for 20 years, and at one point in time was transferred to the real estate cost segregation division of a major accounting firm in New York.
Cost segregation applies to taxpayers that own commercial real estate, and it is the process of identifying personal property assets that are grouped with real property assets, and separating out personal assets for tax reporting purposes. A cost segregation study reclassifies personal property assets to shorten the depreciation time for taxation purposes, which lowers current income tax obligations.
In essence, it is an asset reclassification strategy to accelerate the depreciation deductions that currently exist, to increase the amount of deductions, thereby reducing the amount of taxable income. The analogy is that if you gave me a dime, I could give you a dollar in tax savings. So, based on the tax rate, that dollar might equal 60 cents.
Typically, a cost segregation study will cost about 1% of what the tax savings would be, but JP finds that clients can save up to 20% in taxes with this service. The savings in interest payments alone could help to pay for 2-4 years worth of mortgage payments for a commercial property.
Cost segregation applies to any commercial property that exists today, but typically the threshold for performing a cost segregation study would be that you need to have at least $500,000 in the basis of the asset. If the value of the commercial property or properties is any less than this, it won't make a whole lot of financial sense to do this.
One thing to keep in mind is that these studies don't cost you anything. For example, I had 10 properties that yielded roughly $200,000 worth of depreciation deductions. After a cost segregation study, that amount rose to $1.4 million dollars. That is a $1.2 million increase in depreciation deductions to reduce tax-deductible income. For all 10 properties the cost of the study was around $80,000. The best thing is that even this $80,000 is tax deductible!
In a nutshell, for $80,000, I got $1.4 million in actual tax dollars. There's really not much else I can do but urge you to look into cost segregation studies.
Please don't hesitate to contact me; I would love to put you into contact with JP if you have any questions about this strategy. It is a bit complicated, but it's worth it!
