June 18, 2024


Mad about real estate

Tax Reduction

Tax Reduction – a Result of Cost Segregation

Tax tips and tax help to assist taxpayers by describing optionsfor tax reduction and tax cuts through lawful tax deductions. Tax reduction and tax deferral are the primary benefits of obtaining a cost segregation study. Income taxes are a substantial burden for most real estate investors. Tax deductions help with this burden. While some level of taxation is necessary, it is both inappropriate and imprudent to pay more than your fair share. Income tax is based on net profit or taxable income. The basic formula for calculating taxable income is revenue less expenses (tax deductions). Expenses can include both direct payments to third parties (labor, rent, supplies, etc.) and non-cash deduction. The primary non-cash deductions are depreciation and amortization. Tax reduction (tax cuts) are a direct result of increasing tax deductions. The tax deduction benefit real estate owners gain from cost segregation is a higher level of depreciation. This non-cash tax deduction reduces taxable income and income taxes. For example, if the amount of depreciation increased by $100,000 (as result of a cost segregation study), taxable income would decrease by $100,000, and the owner experiences a $35,000 reduction in taxes (based on 35{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} tax rate). Most real estate owners depreciate real estate based upon splitting the cost basis between land and improvements. The property owner or tax preparer typically estimates the portion for the land and attributes the balance to long-life improvements. Long-life improvements depreciate over 27.5 years for rental residential property and 39 years for commercial property While this simplistic method is lawful, it cheats the real estate owner of tax deductions. A cost segregation study identifies up to 130 short-life components. (Cost segregation is different than component depreciation, which was available until the early 1908s. However, the result of both is to increase depreciation and tax deductions during the early years of ownership.) These short-life components typically comprise 20-50{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} of the improvement cost basis and are depreciated over 5 years (20.0{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} per year), 7 years (14.29{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} per year) and 15 years (6.67{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} per year). Depreciation effectively changes the character of income from ordinary income to capital gains income. While the maximum income tax rate for ordinary income is 35{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4}, the maximum rate for capital gains is 15{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} (less than half the ordinary income tax). This affects substantial income tax reduction. Increasing depreciation also affects deferral of payment of income taxes. Instead of paying taxes (at the ordinary income tax rate) in the year income is earned, taxes are paid (at the capital gain rate) in the year the property is sold. Cost segregation effectively generates an interest free loan (until the property is sold) and reduces the tax rate (from 35{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} to 15{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4}). Click here for a FREE preliminary analysis of tax savings resulting from your property. Cost segregation produces tax deductions and reduces federal income taxes across the country and in every size market. Below are just a few examples of where cost segregation generates meaningful tax deductions. City:

  • Miami, FL
  • Bridgeport, CT
  • Washington, DC
  • San Francisco, CA
  • Atlanta, GA
  • Dallas/Ft. Worth, TX
  • New Orleans, LA
  • New York, NY
  • Baltimore, MD
  • Hartford, CT
  • Indianapolis, IN
  • Wichita, KS
  • Detroit, MI
  • Charleston, SC
  • Providence, RI
  • Grand Rapids, MI
  • Jacksonville, TN
  • Boise, ID
  • Santa Rosa, CA
  • Columbia, SC
  • Columbus, OH
  • Oxnard, CA
  • Greensboro, NC
  • Allentown, PA
  • Harrisburg, PA
  • Louisville, KY
  • Fresno, CA
  • Akron, OH
  • Chicago, IL
  • Portland, OR

Cost segregation produces tax deductions for virtually all property types. Property Type:

  • Manufacturing/processing
  • Tennis club
  • Retirement home
  • Auto service garage
  • Mini-warehouse
  • Single-tenant retail
  • Medical facility
  • Hotel
  • Retail
  • Vacant land

Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation. Industry:

  • Wood product manufacturing
  • Warehousing and storage
  • Truck transportation
  • Transportation equipment manufacturing
  • Textile product mills
  • Textile mills
  • Real estate lesser
  • Publishers
  • Printing activities
  • Plastic and rubber products manufacturing

O’Connor & Associates is a national provider of commercial property real estate consulting services including cost segregation studies, due diligence, insurance valuations, abandonment studies, business personal property valuations, commercial appraisals, feasibility studies, highest and best use analyses, and income tax.

Our services benefit owners of all commercial property types including multi-family housing, retail stores, hospitals, hotels, industrial properties, manufacturing facilities, medical offices, commercial offices, restaurants, self-storage units, shopping malls, shopping plazas and warehouse/distribution centers.