When is cost segregation worth it? How to know when you need a study

In real estate, every situation is different. In your current situation, you might wonder if a cost segregation study is worth it. In other words, will it give you an ROI worth the upfront cost? 

In this article, we’ll examine five different scenarios that property owners like yourself commonly find themselves in, and if a cost segregation study is worth it at that point in the real estate ownership journey. 

5 scenarios where you might ask yourself, “Are cost segregation studies worth it?”

  1. When you’ve owned a property for years

Contrary to what some people believe, you can do a cost segregation study on properties that you purchased built years ago, all the way back to 1986. While it doesn’t always make sense, sometimes it does. 

The amount of time you’ve owned the property is a big factor, as you can find more depreciation savings the sooner you do a cost segregation study after acquiring a property. That’s because in the time you’ve owned the property you’ve been taking depreciation expenses at the standard schedule of 27.5 or 39 years.

If you’ve owned your property for 20 years, it might not make a difference. However, if you’ve only owned it for 5, you could potentially realize some savings.

Another deterrent is that property owners believe they will have to file an amended tax return if they take accelerated depreciation on a property they’ve owned for years, and they’d rather avoid the headache. However, that can be avoided by filing a Form 3115 on your next return and claiming ‘catch-up’ depreciation, which is the difference between what you could have depreciated with a cost segregation study and what you depreciated on the normal schedule. 

While finding some savings on a property you’ve owned for years through cost segregation is possible, you should speak with a CPA about your unique situation. 

  1. When you’ve recently purchased or built a property

This scenario is easy, and the answer is “yes”. The absolute best time to do a cost segregation study is during the first tax year after you’ve purchased or built a property. That’s because you have time on your side, as you can start claiming all of your property’s components for accelerated depreciation sooner for maximum tax savings. 

You can also take advantage of the first-year bonus depreciation, which moves even more of your tax savings into the first year. Whether or not you’re planning to sell the property, it always makes sense to gain access to tax savings now rather than down the road, as you never know what the future will bring. 

  1. When you’re property is worth less than $500,000

When your property is worth less, there are less potential tax savings advantages. However, that doesn’t mean it’s always not worth it to do a cost segregation study. 

Traditional studies that require specialist engineers and accountants are typically reserved for more expensive properties. However, at Commercial Property Refund we’re working to make cost segregation more accessible to smaller property owners. We’ve developed a proprietary software tool that eliminates the need for much of the complex engineering work. 

Working with a CPA, you can use Commercial Property Refund to complete a study for around 1/5th of the cost of a traditional study, which greatly increases the ROI for small properties. 

  1. When you’re worried about getting audited

IRS audits, when they don’t go your way, can be expensive in more ways than just money. Some real estate owners who’d prefer to keep the IRS off their backs might be concerned that doing a cost segregation study would bring them some unwanted attention. However, that is not the case. 

The IRS has no issue—and even fully supports—cost segregation, as long as it is compliant with their rules. Working with a CPA and using IRS-compliant solutions like Commercial Property Refund should not increase your chances of getting audited.

However, if you are concerned about audits for other reasons, you should consult with a CPA, as a cost segregation study is just one of many factors on your tax return. 

  1. When you’ve recently done improvements on a property

Anytime you make major improvements on a property, even if you’ve already done a cost segregation study, it’s possible to gain tax savings by doing a cost segregation study. This is because of something called ‘partial asset dispositions’.

For example, let’s say you’ve replaced flooring throughout an office building. The old flooring and the new flooring can both be depreciated. The full value of the old flooring can be depreciated in the year you replace it. Then, cost segregation allows you to depreciate the new flooring at an accelerated schedule.

It’s possible to do a single cost segregation study in two phases, after you purchase the property and after you renovate it. That’s because you’ve already identified the components that are eligible for accelerated depreciation in the first study, so you’re just pointing out renovations in the ‘new version’ of it. This is another situation to consult with your CPA about, but ultimately one where you could uncover some great tax savings. 

Estimate how much cost segregation could save you

At Commercial Property Refund, we’re all about finding you the maximum savings and increasing your ROI on cost segregation studies by making them more cost-effective and accessible to smaller property owners.

Interested in learning how much you could save by doing a cost segregation study? Check out our free Commercial Property Refund Calculator to get an estimate in seconds. 

About Author

Richard Bourgault

Graduating from Georgia Tech with a degree in Electrical Engineering, Richard has gained over a decade of expereince in Cost Segregation coupled with software UX.

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