Paying taxes is not desirable for any company. After all, it takes away a significant amount of our earnings. The cost segregation option is one of the most sought-after for real-estate owners.
It is a study that allows the owners of multiple people in the family and commercial property to make the best use of the shorter depreciable lives. This speeds up their depreciation expenses.
Another benefit they may get the bonus depreciation on such assets by increasing the deduction amount for the first year.
It is a beneficial option, but it only works if you have enough time. Also, one needs to get a confirmation from the tax advisor whether the added depreciation amount from this process will have tax savings or not.
The part of your office building that you own and is non-productive, i.e., unhelpful in giving you any commercial value apart from the appreciation of its price, in the long run, can be reclassified as personal, and you get tax exemption.
A cost seg company is one such firm that employs cost segregation engineers who can help you with the right estimation about the amount you can save and the amount of property you can declare from professional to personal.
You can have a fair idea of whether the whole process is worth dealing with or not and go ahead with the decision.
Here are three factors that the building owner needs to keep in mind.
1 Duration of the Property to Be Owned
The process of cost segregation works by increasing the depreciation time, for which the owners would have to pay anyway later on. This way, they reap the benefits of the value for the time being. Thus, the owners of the buildings get the money that they would have got later on.
Depending on holding the property, they get an equally large time value of the saved money. By selling the property within a few years of the cost segregation study, they marginalize their benefits. Thus, the sooner they sell the property, the expensive the research proves.
A simple thing to bear in mind for the commercial property owners is that holding the property’s minimum duration should not be less than half a decade to get the actual benefits.
2 Tax Bracket
The cost segregation study can produce a tremendous amount of deduction. However, the deduction is limited to the tax bracket of the owner. If the building owner is in the federal tax bracket of 10%, then the overall tax saving is 10%. However, for those around 40% tax bracket, the protection is up to 40%.
People with higher tax bracket get better benefits from the study than those with the lower bracket.
In the cost segregation study, the real property is made to look like a tangible one. While selling the actual property, as per the IRS compliance, the seller of the thus deemed tangible property has to pay the taxes on the ordinary rates on the depreciation amount claimed during the study year.
If the property owner is planning to sell the overall property the same year, then due to the taxes, the overall amount may turn upside down.
4 Older Properties
One of the things to bear in mind is that the cost segregation study is ideal for getting the benefits in the short run; the money the building owners save is what they would save in the long run. The commercial properties get depreciated by default for being over 39 years.
Thus, such old buildings do not need the cost segregation study. If any facility is nearing such an age, say within the next few years or so, then waiting for that long may prove to be a better alternative.
5 Alternative Minimum Tax
It was imposed long ago and made the wealthy taxpayers pay at least some amount of the taxes. However, it has become a commonplace concern over these years. It also affects middle-income taxpayers.
In this taxation system, the assets get depreciated very slowly. Those commercial building owners who also have to pay the alternative minimum tax may take longer than usual in getting the tax benefits of their deductions from depreciation.
They have to ensure to factor in the delay in the overall taxation and the remuneration amount. Although the alternative minimum tax does not neutralize the benefits of the cost segregation study, the building owners should know about the study’s clashes with the alternative minimum tax process.
A cost seg company can help someone better understand how much one can save in the short run. Thus, consulting a cost seg company is the best way to assure reliable information.