Is Cost Segregation Right for You: Real Estate Tax Strategy

Cost segregation studies have been long considered as an essential tool for real estate tax consultants. Consultants can leverage cost segregation to accelerate the depreciation of their client’s property, whether it’s a single-family home, an office building, or a retail storefront, and deduct it against their taxable income. 

How Does It Work?

Normally, the depreciation of an investment property is claimed on income taxes over a period of time that varies based on the type of investment property owned. Cost segregation, however, allows a taxpayer to expedite this depreciation schedule, which results in higher annual deductions. By utilizing this strategy, taxpayers can reduce the amount of tax they owe every year and lower the expenses associated with owning an investment property.

Does Cost Segregation Increase Audit Risks

Many people believe that conducting cost segregation studies can increase the chances of getting audited by the IRS, but there is no evidence to support this claim. Nevertheless, the IRS has released a “Cost Segregation Audit Technique Guide” to assist its auditors in examining these studies. This guide can also be used as a resource by tax strategists who want to ensure the best possible outcome for their clients. When implementing cost segregation studies, it is crucial to work closely with a tax advisor who specializes in this area to avoid costly mistakes.