How to recieve cash flow from tax savings

If you have acquired or renovated a building in the last 15 years and have a federal tax liability you can have your CPA apply an engineered cost segregation study to your tax return and accelerate the depreciation on the building. About 25% of the components in a building are depreciable in the first five years instead of the standard 39 or 27.5 year method. So for every $1MM in building/acquisition costs the tax benefit is usually $70K to $80K in the first five years.

Basically, you take your depreciation now instead of waiting and taking it over 27.5 or 39 years. It's all about the time value of money. One dollar today at a rate of 4% inflation is worth about 21 cents in 39 years.

An experienced construction engineer, who is also familiar with tax and depreciation rules, determines what part of the building is really a building, and what part of it is related solely to the business operation or is easily removed.

It is important that the cost segregation study be performed by someone very familiar with the rules because some items can be deceiving. Applying the rules can be a daunting task for someone not thoroughly familiar with them.
By using this strategy, real estate owners can lower their income-tax liability and increase cash flow by accelerating a portion of the depreciation to the early years of a building's life.

A cost segregation study requires a thorough study of the plans and specifications, a recompilation of actual costs, detailed estimates, visual observation, and measurements of the structure.

Cost segregation is recognized by the IRS as a valid procedure and there are stringent guidelines as to how a study must be done.

As long as the guidelines are followed, the process can save many thousands of dollars in taxes by allowing property owners to write off the cost of the properties in a shorter period of time.

The IRS allows a taxpayer to go as far back as 1987 to reclassify personal property items that have been incorrectly depreciated. For properties placed in service in previous years a cost segregation study will allow the taxpayer to catch up the depreciation missed in the early years and it can be made up in one year.

New buildings being put into service should always have a cost segregation study unless the tax status of its ownership is such that additional depreciation will produce no tax benefits.