If you were told as a real estate professional that there was a tax credit that could save you thousands in taxes, increase your cash, and allow you to allocate your funds for new investments. You would not only be asking the question: 'Is Paying for a Cost Segregation Analysis Beneficial?' but also 'Why have I not heard of this money-saving benefit?'

Cost segregation has been around for some time. In 1997, the Hospital Corp of America and Walgreens Pharmacy appealed that shorter periods should be available, rather than waiting for 27 ½ to 39 years to get their tax returns. These schedules now follow a five-year, seven-year, 27 ½ years and 39 year depreciation time frame. Here is a breakdown of the classifications and depreciation periods.

Breaking Down the Cost Segregation Classifications

Classification 1 - Building and Personal includes the items added to the property, such as window treatments, moldings, wall coverings, and appliances. These have a five-year depreciation time frame. 

Classification 2 - Site Work and Land Improvements include the work done before the foundation is laid down. These works include soil grading, removal, and all the work done around the construction site's surrounding areas. An example of what falls in this classification are driveways, irrigation systems, patios, and landscaping. These have a 15 year depreciation time frame. 

Classification 3 - Building Structure includes the building, its foundation, roofing system, exterior facade, plumbing, windows, doors, and frames. These have a 27 ½ years depreciation time frame. 

Reasons Why Paying for a Cost Segregation Analysis is Beneficial

Most people overlook that there are benefits that they can get from the very start rather than basing it on a depreciation schedule. The cost segregation analysis presently helps businesses save on their federal income taxes while building on their property portfolios. 

While it takes a team of licensed property engineers to conduct the cost segregation analysis based on their professional understanding of architectural drawings, mechanical and electric plans, read blueprints, and knowledge in bid documents and current tax laws. The overall analysis breaks down all the components in the building of the multi-family, single-family, duplexes, and rental properties into tax classification. Each classification has a different depreciation schedule. 

Early cash-in of money you are entitled to is the first reason why paying for cost segregation analysis is beneficial. By analyzing the components early on, you can start to get your tax refunds rather than waiting for the traditional 27 ½ years. The second reason is that you can combine the components under Classification 2 with cost segregations and accelerate their depreciation time frame. These refunds can lessen the burdens brought about by the construction expenses from the new land and site improvements early on. This benefit does not apply to renovated properties because they have already depreciated. The third and final reason is the cost segregation analysis will give you a detailed study of the real estate property that will be useful during auditing by the IRS.