It’s interesting; In 2017, with all of this technology and knowledge of the Internal Revenue Code at everyone’s fingertips, out of every 10 new accounting clients that I take in, 10 of them depreciate their building(s) the old fashion way. They take the cost of the building and divide by 39 to equal their annual depreciation. Unfortunately, they miss out on accelerating depreciation on assets that can be segregated as “non-real estate”. These non-real assets can be depreciated fast, potentially saving them taxes.
First of all, what is cost segregation? To put the definition in simple terms, in this article cost segregation is reclassifying assets originally classified as real estate into another asset category for the purpose of tax savings.
The fact is that not all commercial buildings are created equal when it comes to tax savings. For example, a warehouse purchased for $1,000,000 typically has $100,000 to $200,000 of property contained in the building that can be cost segregated as personal property. This reclassification provides the taxpayer with higher deductions on some of the building costs up front resulting in an overall tax benefit. Another example would be a taxpayer buying a restaurant building for $1,000,000. Restaurant buildings purchased for this amount typically involve segregated costs of up to $600,000 dollars. This result of the reclassification is a huge tax benefit for the taxpayer. Therefore, it is imperative that the taxpayer achieves the appropriate amount of cost segregation when purchasing a building to minimize their tax liability.