If you are a Commercial or Residential Real Estate Property Owner, utilizing and maximizing your tax savings can substantially support your portfolio. One of the most popular tax deduction strategies for commercial property owners is Cost Segregation. The larger the expense, the lower the taxes. According to the U.S Tax Code, commercial properties can depreciate over 39-year straight-line and residential properties can depreciate over 27.5-year straight line. However, specific improvements can be depreciated over 5,7, or 15 years depending on land improvements. This analysis comes from a Cost Segregation Study which separates personal property assets from real property assets allowing for significant tax breaks.
So what is considered commercial? Commercial properties are typically buildings or spaces that generate revenue from capital gain or rental income. Some great examples of commercial properties include warehouses, office spaces, retail stores, storages, hotels, and supermarkets. Apartments and other rentals would be considered residential properties and would also qualify for a smaller depreciation life than commercial buildings.
Owners must conduct an engineering-based Cost Segregation Study on the property. Cost Segregation is used for real estate reallocation or reclassification. When using this strategy, one may be able to raise a significant cumulative amount of tax deductions for the immediate future.
For example, all buildings, whether commercial or residential, will require repairs. The plumbing costs associated with installing a 3/4′′ copper pipe in a grocery store linked to a toilet sink have to be depreciated for 39 years. The same 3/4′′ pipe built in a sink found in a bakery counts as a write-off for 5 years. The sink to the bathroom is related to a building’s service, the sink to the bakery is related to the taxpayers’ company.
Cost Segregation will act as a powerful tax shield for businesses that have recently made major real estate acquisitions. The opportunity to depreciate a portion of a new purchase over a shorter period of depreciation may amount up to thousands upon thousands of dollars in potential tax savings.
Bonus Tip: The IRS allows existing owners to clock depreciation back as far as 1986. This can be done without previous tax returns being revised. Each of the extra depreciation noticed as a result of our comprehensive engineering-based strategy will be taken in the election year.
Since 1997 we have been providing services in commercial real estate sales, leasing, and commercial property management along with our engineering approach to Cost Segregation. Our professionals possess over 23years of combined commercial real estate experience.