Delving deep into real estate investment brings to light an essential, yet often overlooked, tool in enhancing your investment returns – understanding depreciation and leveraging cost segregation.
Let’s break down these concepts to reveal the key to unlocking potential tax savings:
In the real estate world, depreciation isn’t just a term; it’s an ally that lets you reduce your taxable income systematically over a property’s useful life, which is generally 27.5 years for residential properties and 39 years for commercial properties. Essentially, it means deducing a portion of the cost of your property every year, paving the way for lower tax obligations.
Cost Segregation: Your Tax Savings Catalyst
Here’s where the game gets exciting. A cost segregation study breaks a property into various components, each having different depreciation rates. Imagine segregating tangible personal property (carpeting, cabinets, appliances, etc.) and land improvements (driveways, landscaping, etc.), which depreciate over a 5 to 15 year span, from the building structure depreciating over 27.5 or 39 years. This separation accelerates depreciation deductions, creating a favorable shift in your tax liability.
While a cost segregation can accelerate the depreciation of your property, bonus depreciation can supercharge it. Bonus depreciation allows you to deduct 80% of the cost of a qualifying asset in the year it was placed in service. Qualifying assets include the 5- and 15-year property mentioned earlier. This means that once your cost segregation study breaks out the 5- and 15-year assets, you can immediately deduct 80% of the cost in year 1, instead of breaking it up over 5 and 15 years. However, bonus depreciation is phasing out over the next few years so it is important to take advantage of it while you can.
Navigating the intricacies of depreciation and cost segregations can feel daunting, but they don’t have to be. Elblein CPA is ready to guide you through seizing the benefits that savvy real estate investors have been leveraging for years.