What is cost segregation? A real estate tax savings strategy explained

Buying and owning real estate is expensive, especially come tax time. However, there are some amazing strategies you can take advantage of to lower your tax burden and get better value out of your property. 

The IRS allows you to use a special depreciation method called cost segregation that can greatly reduce your income tax burden through your real estate investments. In the past, this method was prohibitively expensive to many commercial property owners, but our technology is helping to change that around. 

In this article, we’ll explain everything you need to know about cost segregation—and how to do it faster and with better ROI than traditional methods.

What is cost segregation?

To gain the tax benefits of cost segregation, you need to have a professional cost segregation study. This study is typically conducted by engineers who carefully evaluate all of the relevant information on your property. This includes inspections, interviews, blueprints, and property records. However, this traditional method is ripe for innovation and has been made faster and cheaper through technology (more on this later). 

In a traditional cost segregation study, the engineer will take their findings from these inspections and documents and check them against IRS regulations for what can be depreciated over a shorter life span. In some cases, they may be able to use estimates when information isn’t available. 

Why cost segregation matters in real estate?

Cost segregation translates into substantial tax savings. You can potentially reduce the taxable value of your property by hundreds of thousands, or even millions, depending on how much your property is worth and the results of the study. It’s a highly effective strategy to maximize your profits, optimize your cash flow, and strengthen your capital. You can use cost segregation to put money back into your pocket much sooner than you thought possible.

When to conduct a cost segregation study?

You can conduct a cost segregation study any time after you’ve built, purchased, or remodeled a property. Many consider the best time to do a study as within the first year after you’ve purchased, built, or remodeled.

This is because it maximizes the amount you can save over the longest time period, as you spend the least amount of time using the standard depreciation timeframe of 27.5 to 39 years simply by getting the study done sooner.

How much do cost segregation studies cost? And how long do they take?

Cost segregation study fees vary widely based on your property, property type, and provider, but the typical cost ranges from between $5,000-$15,000 per study. Usually, these studies will take around two months. Due to the time and costs involved, many commercial property owners either put off doing a cost segregation study or choose not to do one altogether. 

In fact, many consider these studies as a tax strategy reserved for large corporations. At Commercial Property Refund, we believe that all commercial property owners should be able to access cost segregation studies, which is why we’ve developed our system to automate this process, bring down the costs, and increase your ROI.

How to reduce the cost of cost segregation studies and speed them up

The traditional cost segregation process that involves an engineer meticulously analyzing blueprints and conducting on-site visits is both costly and time-consuming. 

At Commercial Property Refund, we provide cost segregation studies for ⅕ the time it takes to receive a report compared to traditional methods. This gives you an expected ROI of 10-30x and a completed study within 2-3 days, rather than 2-3 months. 

Interested in starting your own cost segregation study for a fraction of the cost? Get a free estimate on how much you could save with our commercial property refund calculator. 

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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