When re-investing, it is wise to find the best tools to get the job done correctly. In order to alleviate some tax liability, implementing cost segregation has the potential to vastly minimize taxes due.
Within real estate, residential properties depreciate over a span of 27.5 years and commercial over 39 years. With straight-line depreciation, the value of the property is lowered over the entire time span. Using the cost segregation tool, the investor can have a study or analysis done on their property to lower their taxable income.
Cost Segregation is a tool that studies or analyzes the investment property and determines how quickly it will depreciate by turning the property into tangible personal property. This changes the standard 27.5, or 39-year time frame into a 5,7, or 15 rate of depreciation. The study will separate certain items such as: the electrical systems, carpet, wall coverings, light fixtures, etc. These items are typically considered a commercial or residential property. Recovery time, the time in which the depreciation occurs is separated as well.
Knowing Your Property
Residential rental property is often treated as commercial property but if it gains income from at least 80% occupied dwelling, it falls in the residential property depreciation bracket. This means it should depreciate over 27.5 years and is able to have a higher acceleration rate if analyzed for cost segregation.
TCJA-Tax Cuts and Jobs Act
This act allows certain investors to get a bonus 100% depreciation on qualifying assets in the first year which requires a cost segregation study. This is only available in the first year after purchase and will be completely gone by 2027.The Tax Cut and Jobs Act combined the four special asset categories into one called QIP
- a) Qualified improvement property;
- b) Qualified leasehold improvement property;
- c) Qualified retail improvement property, and
- d) Qualified restaurant improvement property.
Part of the CARES Act, which began in March 2020 after the outbreak of COVID-10, QIP had and error in giving a 15 year recovery period making it eligible for 100 percent bonus depreciation, but it was fixed.
However,QIP is still eligible for the section 179 expense election eligible expenditures in their trade or business and who are not subject to section 179 expense limitations. Prior to the Tax Cut and Jobs Act, section 179 used to only apply to personal property, but now includes nonresidential property like roofs, heating, and a/c, emergency alarm, and security systems. This does not include several things like elevators, structural framework, enlarging the building, or exterior improvements.
This test relates to revenue, which can reveal that you do have a 39-depreciation time period. As much as this seems like a negative move property owner that have already or plan to make major improvements will gain the 100 percent bonus depreciation related to QIP.
Taking the first step can be difficult without the correct information to set you on the right path to success. At odonipartners.com, you can have the assistance you need to make the best decisions for your investments. Do what’s best for your property and your life.