In case you are late to the game or unaware of this; a cost segregation study (CSS) is a strategic tax planning tool.
It enables property owners, investors, and developers to maximize cash flow and reduce taxable income. How? By accelerating depreciation deductions on their real estate assets. This occurs through the reclassification of certain assets for a shorter tax life.
In 2024 Bonus Depreciation is 60% (part of the 100% phase out of the Tax Cuts Jobs Act). What does this really mean? For all the depreciation identified in the cost segregation study, 60% of that amount can be applied to your 2024 return. In addition, the adjusted straight-line, and the first year of accelerating the remaining 40% of the reclassified assets is applied to your 2024 tax return.
When preparing for 2024 taxes, the benefits of a CSS can be significant and reduce your federal tax liability by generating passive losses. Who benefits?
- Owners: Property owners can identify components of a building, such as lighting, HVAC systems, or landscaping, that qualify for shorter depreciation periods (5, 7, or 15 years) rather than the standard 27.5 or 39 years for residential and commercial properties. This accelerated depreciation allows owners to defer taxes. Thus, reinvesting their savings into other projects, operational costs, or debt reduction, enhancing their financial flexibility.
- Investors: For real estate investors, a CSS can significantly improve after-tax returns. By accelerating depreciation, investors reduce their taxable income in the early years of property ownership. This creates a higher return on investment (ROI) and aligns well with tax strategies like the 100% bonus depreciation phase-out. This is still partially available in 2024 (at 60%). Investors can also utilize these deductions to offset other passive income, further optimizing their tax position.
- Developers: Developers benefit by incorporating cost segregation into their project lifecycle. By identifying and implementing “tax efficient” methods and materials during construction or post-acquisition, they can optimize tax savings for themselves or future buyers. This can make properties more attractive to investors and improve profitability.
As you prepare your taxes for 2024, a cost segregation remains a powerful tool. Allowing taxpayers to reduce upfront tax liabilities and leverage cash savings for growth.
FYI… It’s not too late to engage in a study for 2024 taxes. The study does not need to be completed before 12/31/2024, just before you file your 2024 taxes. Do your homework and ensure it can benefit you and your tax return.
Not all cost segregation studies are created equal. Be discerning.
Search for a professional cost segregation firm, with a track record. I suggest that you don’t just shop on price. Remember the adage, “Skilled Labor Ain’t Cheap, and Cheap Labor Ain’t Skilled”. It’s important that you have a detailed study that will stand up to an IRS audit.
Selecting a credible firm ensures two things; 1) you can maximize your tax benefits/deductions on your 2024 return, and 2) compliance with IRS guidelines, should your tax return come under audit in the future.
It should be noted: there is discussion the Trump administration could extend or make permanent the TCJA tax benefits. “If” this happens quickly (in Feb), it’s also possible 100% Bonus Depreciation could be retroactive to 2024. This is a big “if”, but many investors are watching for this.
If we can be of service to you and your firm, please reach out.
