Yes, cost segregation can protect you from inflation.
It is also a risk management tool in an inflationary market.
Just check the news, inflation is the #1 economic concern for our nation. Skyrocketing gas, electricity, and grocery prices. Supply chain issues and the baby formula shortage. Rising interest rates. It cuts across both the producers and consumers. Even with our current rate of inflation, consumer spending has remained steady, fortunately.
Still, the dollar today is buying less than it did yesterday.
This is a “kitchen table reality” for many families across the nation. Ignore partisan politics, this truly is a current concern for many people on both sides of the aisle. So, what can you do?
How can investment in real estate protect you from Inflation?
If you happen to own income producing real estate, you can engage a cost segregation study. Any property type works. A rental home-condo, a short-term rental (Airbnb/Vrbo), multifamily apartments, industrial or flex property, office properties, retail malls or strip centers, hospitality, self-storage, whatever. Size doesn’t matter. Whether you invest in $100K homes, $10M office buildings, or $100M manufacturing plants, this real estate tax strategy can work for you.
If you are unfamiliar with this effective tax strategy, let me explain. Cost segregation is a method of accelerating depreciation. This happens when engineering and construction professionals reclassify the usable life of qualified components within your real property. By doing this, federal tax deductions are created. With these increased tax deductions, you pay less taxes and keep more of your own money. Thereby increasing your cashflow.
You know the old adage, Cash is King!
This is also the last year for acquiring property using 100% bonus depreciation. This option allows you to deduct “all” the reclassified asset values in the first year. For example, on a $100K home, we may reclassify 30% of the assets. This creates a $30K deduction using 100% bonus depreciation. (Otherwise, it would be spread over 5 and 15 year adjusted life classes.) If you don’t use all the generated tax deductions this year, the rest becomes a suspended or carry-forward loss to use against your taxes in future years.
Follow this up on a $1M, $10M, $100M asset; the same general path applies for these deductions. You can see how this IRS encouraged tax strategy can protect you against inflation.
“As a practical matter, cost segregation studies should be applied by the taxpayers.” IRS, U.S. Department of the Treasury
How is cost segregation a risk management tool?
Certainly the increased cash flow today, will improve your operational flexibility. This added cashflow may be used to improve your property, invest in more properties, or support your business operations as needed.
That said, the real risk management aspect is if the economy shifts and we see a significant correction. Many economists are suggesting some level of future correction to the market, what that will be is anyone’s guess.
If this happens, your investment could then lose significant value. By taking 100% bonus depreciation, you essentially reduce the book valuation of your property. In effect, reducing your exposure to a higher valuation property loss should there be a correction.
So, if you are selling in a future down market, you have reduced the risk of future losses. This could make the difference in keeping your property, or having to sell at a financial loss.
As you can see, a cost segregation study can not only can protect you from inflation, it also offers risk mitigation against the economic risk of a future market correction.
Is cost segregation right for every real estate transaction? Not necessarily.
Is it worth evaluating the potential benefits in your situation? Absolutely.
To learn more and get a no-cost tax benefit analysis on your property, email us at firstname.lastname@example.org.