Understanding Real Estate Cost Segregation

If you want to save while making more money in real estate, you have to be knowledgeable in cost segregation. Learn it here. In today’s article, we are talking about real estate cost segregation: what it is and how it will benefit you.

Defining Cost Segregation

Cost segregation is a generally utilized tax planning tool. It permits organizations and individuals who have developed, bought, extended, or rebuilt any sort of real estate to increase income by speeding up depreciation deductions. Through cost segregation, they can also defer paying government and state taxes.

Every investment property has a flat line, a depreciation of 27 ½ years for an investment residential property, at least. 100% of the building value over the course of those 27 ½ years gets fully depreciated, usually about 3.63%. 27 ½ x 3.63 = 100%

However, cost segregation allows outside firms to use the IRS tax codes to expedite the depreciation process. So instead of having a flat line, you are going to have a huge bump and appreciation for the first 5 or 10 years and then it tapers off.

How Cost Segregation Helps You Save More Money

At the end of that same 27 ½ years, you depreciate the same 100%. But at the beginning, perhaps when your property isn’t making as much money, you would have paid the mortgages and everything else. You will need that depreciation to offset and help you save more money.

Perhaps at this time of year, think about it 27 ½ years from now. You might be retired, making less money, or in a lower tax bracket: you need the tax savings now. 

Firms out there charge anywhere between $1,000-$1,500 per property. But it saves potentially $10,000 to $20,000 depending on how much your property is worth. At the end of the day, cost segregation is fantastic to expedite some of that depreciation to the earlier years of when you own a property rather than just allowing you to flat line it.

Our commitment

If you or anyone else you know is looking to find a property manager to help guide you through the process of both owning and managing an investment property as well as saving and making more money, please think of Green Ocean Property Management: where you get more than a property manager, you get peace of mind.