How a cost segregation study allows investors to save BIG on taxes….
Cost segregation study is a federal income tax tool that allows you to classify components of an apartment complex into shorter recovery periods for computing depreciation. Without a cost segregation study, you can depreciate the value of an apartment building over the course of 27.5 or even 39 years. With cost segregation, this allows you to accelerate your depreciation MUCH sooner allowing for tax payments to be decreased and most importantly an increase in return for investors!
Video Transcription
Meet Melody
Melody is looking into becoming a passive investor in multifamily real estate
Melody’s friend Caitlin tells her that performing a cost segregation study for a multifamily property could be a powerful tool in saving a TON on taxes! She explains that this will ultimately pass through tax savings to investors of the property, which helps increase the overall returns!
Melody wants to know what cost segregation is and how it can save her on taxes?
Caitlin explains that if she owns real estate or is part of a partnership that owns real estate, Melody’s property could qualify for Cost Segregation which could save her a ton of money on her taxes!
She explains that a Cost Segregation Study is a federal income tax tool that increases your near-term cash flow, in the form of a deferral, by utilizing shorter recovery periods to accelerate the return on capital from your investment in the property!!
Whether newly constructed, purchased or renovated, the components of your building may be properly classified through a cost segregation study into shorter recovery periods for computing depreciation. The study carves out (into 5, 7, and 15-year lives) certain qualifying portions of your building that are normally buried in 39 or 27.5-year categories!
When an asset’s life is shortened, depreciation expense is accelerated, and tax payments are decreased! This decrease can flow down to investors on their K1 if they’re a part of a partnership and help offset passive income, and in some cases, active income, that they may have incurred for that tax year, therefore putting more money in investor’s pockets!
Melody is thankful to Caitlin for explaining the benefits of cost segregation for multifamily real estate and the benefits it provides to passive investors!