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The resultant tax cut can be substantial.
Depreciation is a non-cash expense which increases total expenses and reduces taxable
income. Real estate depreciation is based on the concept that improvements to land
physically deteriorate overtime. Real estate owners are allowed to depreciate a portion of the
cost basis to account for this physical depreciation. (In reality, the market value of
improvements typically appreciate in value over five or 10 years even though depreciation is
recorded for accounting purposes.)
Real estate depreciation both defers and reduces federal income taxes. Depreciation defers
income taxes from the time income is earned until the property is sold, or a gain from the
property is recognized. (Real estate investors may defer recognizing the gain on the sale of
property by utilizing a 1031 exchange.) Depreciation reduces federal income taxes by
converting the character of income from ordinary income to capital gains income. The
maximum income tax rate for ordinary income is 35% while the maximum income tax rate for
capital gains income is 15%. Although some depreciation is recaptured at a 25% rate, it is
possible to have much of the income shielded by depreciation recaptured at 15%.
Furthermore, even if depreciation simply reduces the tax rate from 35% to 25%, and defers
payment of taxes for a period of years, the savings are meaningful.
Cost segregation is a specialized service real estate investors use to maximize depreciation.
Cost segregation is typically performed by real estate appraisers or engineers to fine tune the
real estate depreciation schedule. Cost segregation identifies and quantifies up to 130
components which qualify for short-life depreciation. The building structure is depreciated
over 27.5 years (rental residential property) or 39 years (commercial property). Short-life
property is typically depreciated over 5, 7 or 15 years. Obtaining a cost segregation report
often allows real estate investors to allocate 20 to 40% of the cost basis to short-life
depreciation. Shifting a significant portion of the cost basis from long-life components to
short-life components can increase depreciation by 50% to 100% during the first five to
seven years of ownership.
Depreciation is a powerful income tax reduction tool specifically available for real estate
investors. Real estate investors can magnify the benefits of depreciation by utilizing cost
segregation.
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:
2. • New York, NY
• Bridgeport, CT
• Hartford, CT
• San Francisco, CA
• Memphis, TN
• Boston, MA
• Los Angeles, CA
• Baltimore, MD
• Orlando, FL
• Denver, CO
• Birmingham, AL
3. • Sacramento, CA
• Honolulu, HI
• Bakersfield, CA
• Lakeland, FL
• Dayton, OH
• Milwaukee, WI
• Santa Rosa, CA
• Portland, OR
• Jacksonville, TN
• Colorado Springs, CO
• Fresno, CA
4. • Greenville, SC
• Worcester, MA
• Louisville, KY
• Albuquerque, NM
• Springfield, MA
• Syracuse, NY
Cost segregation produces tax deductions for virtually all property types. Property Type:
• Research and development
• Auto salvage yard
• Manufacturing/processing
• Used car lot
5. • Movie theatre
• Night club
• Motel
• Truck stop
• Commercial building
• Greenhouse
Almost every industry, including the following, can generate cost-efficient tax deductions by
using cost segregation. Industry:
Mineral product manufacturing
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• Golf courses and country clubs
• Building supply dealers
• Truck transportation
• Printing activities
