If you own a commercial or residential rental property, you may be able to use cost segregation studies to accelerate depreciation and save on taxes. Cost segregation is a tax strategy that identifies and separates the components of abuilding that can be depreciated over shorter periods of time, such as 5, 7 or15 years, instead of the standard 27.5 or 39 years. By doing so, you may be able to increase your current tax deductions, in the form of bonus depreciation, and reduce your taxable income.
To perform a cost segregation study, you need to hire a qualified professional who can analyze your property and prepare a detailed report that breaks down the assets into different depreciation categories.
The report should also document the methodology and sources used to support the allocation of costs.
For smaller properties, it may be advantageous to use one of the DIY cost segregation tools that are available. These cost less than the full blown cost seg. Some offer audit protections. This means that they will come back and do a full blown study in the event you get audited.
Cost segregation studies can provide significant tax benefits for real estate investors. However, they also involve some costs and complexities, such as fees for the professional service, potential audit risks, and increased depreciation recapture when you sell. Therefore, you should consult with your tax advisor before deciding to pursue this strategy.