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When Does Cost Segregation Make Sense?

There may well be times when cost segregation does not make sense. Depending upon circumstances, you may have a nice report, but no savings. The relevant cases are easy to summarize:

  • Cost segregation makes sense if you have substantial ordinary taxable income which cannot otherwise be offset.
  • Confirm that you are eligible to deduct the depreciation. Limited partners are only able to deduct losses to the extent they have passive income.

It is important to understand the mechanics of tax deferral and tax elimination. Most investors understand how additional depreciation via a cost segregation study defers income tax, but there is still a myth that cost segregation only defers income tax. The reality is it defers and reduces income taxes by transitioning ordinary income (taxed at your high ordinary income tax rate) to capital gains, which is taxed at the time of sale at capital gains income tax rates. Depending upon your ordinary income tax bracket, this can introduce a favorable delta of 15% to 22%.

Cost Segregation Means Tax Savings

If you qualify, cost segregation is very powerful and cost efficient. Tax savings of 10:1 to 100:1 are not unusual. The cost is a flat fee, often miniscule relative to the savings. Remember, the larger the property, the better the results.

Obtain a preliminary analysis that reflects numerous data points on your property. The accuracy of preliminary analysis is excellent, and they are free.

Compare the income tax savings with the fee and determine if it makes sense for you. You can also compare the payback ratio with the site-visit or without it.

Feel free to contact our experienced consultants.

In summary, if you have substantial taxable income, cost segregation is an acceptable method to defer or eliminate the taxable income by increasing depreciation.