Frequently asked questions
Cost segregation is a strategic tax planning tool that allows real estate investors to accelerate depreciation deductions by reclassifying certain components of a property as personal property rather than real property.
This reclassification allows for faster depreciation, resulting in increased tax deductions and improved cash flow in the early years of ownership.
This is where cost segregation comes into play, offering real estate investors the opportunity to maximize their tax deductions and enhance their cash flows.
Cost segregation allows you to accelerate depreciation on portions of your building and site by identifying them as personal property. By accelerating depreciation, you lessen your tax burden and put more money in your pocket.
As an example, if you are in the 37% tax bracket, and your cost segregation study gives you an additional $100,000 in depreciation for your first year, that could be $37,000 in extra cash flow.
The primary benefits of cost segregation include:
Accelerated Depreciation
By identifying and reclassifying eligible components, cost segregation allows for shorter depreciation periods, resulting in larger tax deductions in the early years of ownership.
Increased Cash Flow
The increased tax deductions lead to lower income tax payments, freeing up more cash for reinvestment or other purposes.
Tax Savings
Cost segregation can result in significant tax savings over the life of the property, potentially thousands or even millions of dollars.
Enhanced Property Value
The potential tax benefits can make a property more attractive to potential buyers, increasing its market value.
IRS Compliance
Cost segregation studies are performed by qualified professionals and adhere to IRS guidelines, ensuring compliance and reducing the risk of audits.
Virtually any type of real estate property can be eligible for cost segregation, including:
Commercial Properties
Office buildings, retail centers, industrial warehouses, hotels, and other commercial properties often contain a significant amount of personal property components.
Residential Properties
Apartment complexes, multi-family dwellings, and even single-family homes can benefit from cost segregation, particularly if they have undergone renovations or contain significant personal property components.
Special-Purpose Properties
Hospitals, nursing homes, assisted living facilities, and other special-purpose properties can also be eligible for cost segregation.
If you own an investment property, our cost segregation studies can help you maximize tax savings and improve cash flow.
Yes, cost segregation can be performed on an existing property, even if it has been owned for several years.
This is known as a “look-back” study, and it can still result in significant tax savings by allowing for the recapture of depreciation deductions that were not previously claimed.
Cost segregation can be performed at various stages of a property’s life cycle, including:
Acquisition
Cost segregation can be performed shortly after acquiring a property, allowing investors to immediately benefit from accelerated depreciation.
Construction or Renovation
Incorporating cost segregation into the planning process for new construction or major renovations can maximize tax benefits.
Existing Properties
Even existing properties can benefit from cost segregation, potentially unlocking significant tax savings.
Cost segregation and bonus depreciation are both tax strategies that can accelerate depreciation deductions.
However, they differ in their application and eligibility requirements.
Cost Segregation
Cost segregation involves reclassifying certain components of a property as personal property, allowing for shorter depreciation periods. It is available for both new and existing properties and can be applied to a wide range of property types.
Bonus Depreciation
Bonus depreciation allows for an immediate deduction of a specified percentage of the cost of eligible property in the year it is placed in service. It is typically available for new property and has specific eligibility requirements.
Concerned that a cost segregation study might trigger an IRS audit? The reality is, it won’t. Cost segregation is an IRS-approved strategy, and when executed properly, it fully complies with tax regulations.
Our reports follow IRS guidelines to minimize audit risk, and we have a proven track record of supporting clients through audits when needed. With our expertise, you can maximize tax savings with confidence.
Audit support is included in all our Cost Segregation Studies. You will receive audit support if the IRS raises questions regarding the cost segregation study obtained from EmeraldCoastCostSeg.com
Our audit support includes a thorough defense of the reported figures at no additional cost, except for direct travel expenses if an on-site visit is required. You must also provide detailed photos or videos of the property in any audit situation. Failure to do so will void audit support.
Yes, you can. If your building was recently placed into service, you may only need to amend your previous tax return. However, if more than a year has passed since filing, you will likely need to submit IRS Form 3115 for a Section 481(a) adjustment, also known as a change in accounting method.
This allows you to retroactively claim missed depreciation benefits from the time your property was placed into service. Please consult your accountant or tax advisor for guidance regarding the filing process.
We recommend consulting with your tax professional to determine the appropriate land value for your study.
Based on our understanding, you may use the county’s assessed value to calculate the land percentage relative to the building value and apply that same percentage to your purchase price. However, it is essential to verify this approach with your CPA before proceeding.
Yes! A look-back study can be performed on assets acquired as far back as 1987, allowing you to claim missed depreciation deductions without the need to amend prior-year tax returns.
This is done using Form 3115 for an Automatic Change in Accounting Method.
Cost segregation can be applied retroactively to properties acquired in previous years, enabling property owners to “catch up” on unclaimed depreciation in the current tax year.
However, the longer you’ve owned and depreciated a property, the lower the potential benefits of a study.
Contact us today to see if a cost segregation study is the right fit for your property.
The benefits of cost segregation depend on your ownership timeline and tax strategy. Even for short-term ownership, accelerated depreciation can provide substantial tax savings, but potential depreciation recapture should be factored into your decision.
If you plan to sell the property in a taxable transaction within a short period, a cost segregation study may not be the best option due to potential recapture taxes. Generally, we recommend holding a property for at least 3–5 years to maximize the benefits.
However, if you intend to complete a like-kind exchange (1031 exchange), depreciation recapture can be deferred until the replacement property is eventually sold. Our team can help you assess whether cost segregation aligns with your investment goals.
It's important to understand the distinction between active income, which comes from employment or business activities, and passive income, which is generated through investments or rental properties.
Unless you are a Real Estate professional, you typically cannot use losses from a cost segregation study to offset your W2 income. However, for short-term rentals, the income is generally considered passive. If the taxpayer actively manages and maintains the property, there may be an opportunity to offset this passive income against active income.
We recommend consulting with your tax professional to determine your eligibility and ensure you're maximizing potential tax benefits.
Yes, you can. Cost segregation studies can be conducted retroactively for properties placed in service in previous years. This allows you to claim missed depreciation and potentially amend prior tax returns to maximize your savings.
The cost segregation study serves as a valuable tool for your CPA to optimize property depreciation. It is a one-time process with no specific timeframe for completion. If you intend to use the study for a particular tax filing, it remains valid for that tax year, as long as the property was placed in service within that same tax year or prior.
The report is valid as long as it is submitted before filing your taxes, regardless of the year in which the study was conducted.
The ideal time to conduct a cost segregation study is soon after purchasing or placing the property in service. However, you can still benefit from the study at any point during your ownership. The sooner you act, the faster you'll realize the tax benefits.
At Emerald Coast Cost Seg, we provide cost-effective Cost Segregation Studies designed to fit your budget and property needs. Pricing is based on factors such as square footage, property type, and complexity, ensuring a fair and competitive rate. We offer transparent, upfront quotes with no hidden fees.
In most cases, the tax savings from a study significantly outweigh the cost, making it a smart investment with strong returns.
Compare our services or request a free, no-obligation proposal today!
The timeline for our Engineered Analysis Cost Segregation Study depends on the size and complexity of the property, as well as the availability of necessary documentation. However, it typically ranges from 4 to 6 weeks, depending on the size of the property and the level of service required.
For simpler properties, our Express Analysis service offers faster turnaround times, ensuring you receive your study quickly without compromising on accuracy.
Common documents required for a cost segregation study include the purchase agreement, closing statement, and any available property appraisals or construction records.
Don’t have all the paperwork? No worries—our team is experienced in working with limited documentation and can still provide accurate results for your study.