The term “cost segregation” sounds complex, but the good news is that it works the exact same way. Since the IRS has different timelines for how long different things will last, it is often beneficial to take the portion of the sale price you paid for the building and split it up even further.
In our price divided by lifetime equation, as the total lifetime an item is expensed over decreases, the annual depreciation expense goes up. So, by redefining which IRS category something falls into, you can potentially claim it has a shorter lifetime and speed up the amount you expense in the early years of ownership. Hence the more common name, “accelerated depreciation.” And remember - since this expense is a paper loss, the higher you can make it, the more income you can keep from being taxed.
Ultimately, how quickly you can benefit from depreciation comes down to how much of your property falls into each of the IRS’s four different categories:
Personal property that you have a hand in choosing, like a bathroom fixture or carpeting, can be expensed over 5 or 7 years
Improvements to the land, such as sidewalks or fencing, can be expensed over 15 years
The building is expensed over 39 years if it is commercial (or 27.5 years if it’s residential)
The land is not expensed
The boundaries and definitions on where things fit can be rather vague, making it absolutely critical that you hire experienced professionals to conduct a “cost segregation study” on your property rather than trying to figure it out yourself. Usually the ones conducting the study will have a team made up of accountants, lawyers, and engineers, who work together to decide which things should go into each category.
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4 окт 2024
