Cost Segregation: As a multifamily property owner you should know about it, and be doing it.
You’ve just bought or constructed a multifamily property in the heart of Manhattan. What are the tax implications of your purchase? Well, if you are like some savvy multifamily owners, you know that a cost segregation study can save you thousands on your taxes and you call your accountant right away to get one performed.
What is Cost Segregation?
Cost segregation is an engineering-based tax strategy that immediately increases your income and decreases your federal tax liability by maximizing the deprecation of select assets in your building. Instead of the usual 39.5 year structural building depreciation, cost segregation reclassifies assets designated by the IRS as “personal property” that can be depreciated at a rate 5, 7, or 15 years. A cost segregation study will identify and maximize depreciation on those assets allowing annual depreciation of up to 50% on these components, resulting in increased cash flow and return on investment.
Examples of IRS approved 5/7 year assets include:
- Decorative wall Coverings
- Carpet & Wood/Laminate Flooring
- Decorative Millwork
- Accent Lighting
- Electrical Circuits dedicated to Equipment
Examples of IRS Approved 15-year assets include:
- Site Lighting
- Retaining Walls
- Underground Storm Drainage
How much property do you need?
Tax advantages of a cost segregation study vary by property type. Generally, property that is worth upwards of 1M will qualify and how much tax savings you receive will depend on the specific assets and land improvements in and around your building. On average, a property with a cost of 5m (excluding land) should expect increased cash flow benefits of approximately 200,000 if 20% of the costs are reclassified.
A cost segregation study can be performed on new construction, acquisition, or a previously owned property. The best time to perform a study is during the construction or when first acquired, but a retroactive study can be employed for properties that have been owned for up to 15 years without amending tax returns.
For example, you just built a $10,000,000 apartment building with 36 units over 10 owner-financed 1st floor fit-outs. After an initial proposal from a cost segregation company that specializes in performing studies, you learn initiating a study will save about $400,000 in taxes. The study will require a cost segregation engineering professional to perform a site visit of your property where they will categorize all the assets in your building that qualify for accelerated depreciation, and within 4-6 weeks, your completed study will be delivered to you and your accountant, ready to be sent off to the IRS.
Cost segregation is a valuable tax tool when purchasing or owning a multifamily property. This IRS-approved strategy can safely put money back into your pocket for additional upgrades to your building or other real estate ventures. Contact Beth Burke at Cost Recovery Solutions today at 732-548-3855 x109 and talk to a professional who can save you significant tax money.