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Taxes from real estate investing are like rain when golfing– you’ll deal with it to a certain extent, but it’s not ideal.  Most real estate investors choose this tangible asset class BECAUSE of the tax advantages, in addition to the steady income and appreciation.

So how do we maximize our tax advantages to put more money in our pockets?  One of the most common ways is to perform a cost segregation study.

A cost segregation study is a detailed tax planning tool that’s implemented for your specific asset.  It allows you to depreciate certain items of the asset at an accelerated rate, ultimately reducing your income tax obligations.

An accountant and engineer go through your property’s components, item by item, and determine the “useful life” of each component of the building. 

For example – you may look to hold on to a property for 5 years, and the roof of your building may have 10 years of useful life remaining.  The accountant will take the estimated value of the roof and depreciate that value over your 5-year hold period to speed up the depreciation expense of the roof.  This allows the owner to write off this specific expense 2x quicker than normal, lowering your taxable income.

Some of the items looked at in a cost segregation study include plumbing fixtures, carpeting, HVAC, roofs, electrical components, parking lots, walls, ceilings, and lighting, to name a few. 

By performing a cost segregation study on your asset, you could lower your income tax by a significant amount.  To maximize the benefits, it’s best to get it done within a year of purchasing the building, or immediately after major construction or remodeling the asset.  You’re going to spend somewhere around $7-15k upfront, but it will likely pay itself back within the first year.

The larger and more intricate the asset, the more beneficial it is to perform a cost segregation study.  It’s an extremely powerful tool used by sophisticated real estate owners.  To find out whether or not it’s the right fit for you, speak to your accountant and they’ll walk you through the process.  Check it out, you can thank me later.

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