In this episode you will learn a tip for tax deduction when you buy a property, it’s useful even if you have already bought some properties: cost segregation. What types of properties can benefit from cost segregation, we’ll go over an example of how much you’ll be able to deduct on your taxes, why it’s important to have cash on hand today versus in five years, what is bonus depreciation and how much a cost segregation study would typically cost. We're interviewing Yonah Weiss, a Business Director at Madison SPECS, a national Cost Segregation leader.
You can read the interview here: https://montecarlorei.com/what-is-cost-segregation-what-types-of-properties-can-benefit-from-it-whats-bonus-depreciation-and-how-much-would-a-cost-segregation-study-cost/
What is cost segregation?
It’s a tax benefit for real estate investors and it has to do with depreciation. When you own a property, you get a tax deduction called depreciation. Where cost segregation comes into play is the fact that the IRS determined that things in the property have different useful lives, anything that is not part of the structure of the building depreciates over five years. Then you have another category of things called land improvements and this can be anything like pavement, asphalt, parking lot, landscaping, fencing, anything outside the building actually depreciates over 15 years instead of 39 years. You break out the components of the property into their cost, and depreciate them at a faster rate.
What type of properties qualify for this?
Any type of property, as long as it’s not your personal residence, it can be commercial, residential and multifamily, office, assisted living, hotels, hospitality, self storage, industrial, shopping malls, golf courses, mobile home parks, etc.
What is the main benefit of doing cost segregation?
The cashflow. When you have more deductions than you have income, you don’t write a check. We’re not talking about getting free money, what we’re talking about is keeping the money that you made and paying less taxes, or no taxes. In many cases, the main benefit is the cashflow, you’re able to use that money to invest. The second thing is the time value of money because you can take huge deductions early on and make sure that you’re using that money to invest. The time value of money means money today is worth more than it is five years from now. If I were to offer you $50,000 today or $10,000 a year or five years, what would you take?
What is bonus depreciation?
It used to be a rule that when you developed a new property, you could take 50% of the depreciation of that property in the first year of that new construction. The law changed in that it’s now for any property that you buy, not just new developments. All the depreciation that is less than 20 years (in the example that we gave, the five-year personal property and 15 year land improvements) all of that cost segregation is eligible for bonus depreciation, you can actually take 100% of that depreciation in the first year of ownership, instead of spreading it over five years. You have a choice of 100% or 50%, which really gives you a much added benefit to take, to knock off your entire income tax liability in the first year.
How much would it cost to do a cost segregation study in our example property, 30,000 square feet office that was purchased for $3 million?
At our firm and for that property, it could cost around $5,000-$6,000.
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