Cost Segregation
Cost segregation studies are a powerful tax strategy for real estate investors, enabling significant tax savings by accelerating depreciation. However, it’s not a one-size-fits-all solution. Before diving into a cost segregation study, it’s essential to evaluate whether this strategy aligns with your financial goals and circumstances.
Here are the key factors to consider:
What is the purchase price of your property?
Cost segregation can be performed on any property (except your primary residence), but for properties under $200,000, the potential tax benefits may not justify the cost of the study.
How long do you plan to hold the property?
If your holding period is less than two years, a cost segregation study may not be worthwhile, as short-term ownership limits the time to realize the tax benefits.
What is the land value of the property?
Since land cannot be depreciated, properties with a high percentage of the purchase price allocated to land may have less depreciation basis to accelerate.
What’s the potential ROI of the cost segregation study?
Some cost seg firms offer a free upfront feasibility analysis. This can then be evaluated with your CPA to determine whether a cost segregation study is a wise investment for your property. Our firm does not provide the actual cost seg study, but we can help to analyze it. We recommend Yonah Weiss from Madison Specs.
Are you planning to continue investing or holding?
Cost segregation is most beneficial for investors planning to expand their portfolios. Depreciation deductions from one property can offset income from other investments.
Do you need the cash flow generated from tax savings?
Consider how the tax savings could fuel reinvestment to grow your portfolio and build long-term wealth.
Are your investments active or passive?
The nature of your real estate activity impacts how depreciation deductions can be applied.
Do you or your spouse qualify for Real Estate Professional Status (REPS) or Material Participation?
If you or your spouse have REPS, you can apply passive losses to offset active income, like W-2 wages. Material Participation is a different test.
What other tax strategies are you using?
Strategies like 1031 exchanges can influence the benefits of cost segregation.
Are tax extensions free?
Yes, filing a federal tax extension is free. My Online Accountant does not charge a fee to extend returns. However, if you owe taxes, you’ll need to pay the estimated amount due to avoid interest and penalties. We will use the documents and information you have provided in order to calculate the estimated tax.
Does your CPA specialize in real estate taxation?
Working with a CPA who understands the nuances of real estate tax law is crucial to fully leveraging cost segregation and other strategies.
Get Expert Guidance
At My Online Accountant, we’re passionate about helping real estate investors make informed decisions about their tax strategies. We specialize in real estate taxation and offer personalized advice to ensure cost segregation fits into your overall financial plan.
Start with a complimentary consultation to see if cost segregation is right for you.