Part 3 of Jim Sacher’s 12 Great Ideas for Tax Savings series
What to Look For
As a general rule of thumb, if you have purchased commercial real estate for an amount over $750,000, you may be able to reduce your taxes by having a cost segregation study undertaken. Cost segregation is a well-established method of reclassifying building assets into shorter lived property to reduce the tax load of commercial real estate owners.
There may be certain components of your property that can be separated from the rest for faster depreciation and tax savings. A cost segregation study identifies how much of the cost of your property that is otherwise depreciated over 27.5 or 39 years can be reclassified into shorter lives of 5, 7 or 15 years, thereby speeding up tax deductions. Without cost segregation, a building owner will claim depreciation deductions over a very long period of time on the entire cost of the property. The study uses blueprints and cost reports to determine whether the property could produce tax benefits from asset reclassification, and if it does, can document the amount of building cost to reclassify into shorter lived property.
When considering the value of money over time, you gain significant early tax savings by speeding up the depreciation deduction schedule. You get more deductions in the first 5, 7 and 15 years than if you didn’t order the study and reclassify the assets. Even if a building was placed in service in a prior year you can still benefit from a cost segregation study. The change in the classification of assets is considered a change in method of accounting, but qualifies for automatic permission for the change. The result is that all of the prior year depreciation is caught up in the year of change. This can provide some substantial, immediate tax savings.
For example, after a cost segregation study, Skoda Minotti was able to reclassify various components of buildings owned by a client. The change amounted to about $1 million of the original purchase cost of the property being considered “personal property” as opposed to “real property.” The personal property was depreciated over a much shorter life span, resulting in significant tax benefits.
If you’re not sure if a cost segregation study will be beneficial to your business, you can conduct a feasibility study to help quantify the amount of tax savings you could receive. You should also review the idea in the context of your overall tax position to be able to determine if any obstacles may prevent you from realizing the full effect of the increased tax deductions.
Stay tuned for the next article in our series on minimizing self-employment tax for LLC members. For questions on how you can take advantage of any of these tax savings ideas, please contact Jim Sacher at 440-605-7145 or firstname.lastname@example.org.