Real Estate Cost Segregation

Real Estate Cost Segregation

When can real estate owners utilize cost segregation? Cost segregation is a valuable planning tool for real estate owners looking for ways to reduce their tax liability. A simple cost segregation example would be when a real estate owner utilizes cost segregation on a new apartment complex or shopping center. While the concept of cost segregation (or cost seg) is simple in practice, it can be more difficult; for example, no one has ever written a book cost segregation for dummies. As mentioned in the simplified example, cost seg can be utilized in multiple situations; for example, cost segregation on rental property is a common scenario. However, taxpayers need to consider things like passive losses and self-rental situations. Completing a cost seg study can be difficult. While cost segregation software does exist, it is rarely complex enough to handle the difficulties of completing a full study. Most quality cost segregation companies use proprietary cost segregation spreadsheets to qualify studies as well as to complete their work. A typical cost segregation study example would be a company running a preliminary estimate on their cost segregation spreadsheet to determine the qualification and potential tax savings. Once these tax savings are run, the taxpayer can decide is cost segregation worth it. If they decide to move forward, the cost segregation provider can move forward with the process, including scheduling site inspections and fieldwork. However, it is critical that a qualified cost segregation provider be hired. Cost segregation relies on old tax laws dating back to investment tax credits, or itc. A quality provider understands how itc and cost segregation studies work in combination. Hiring a quality provider can go a long way to making sure benefits are maximized and defendable under audit. Talking to McGuire Sponsel can help qualify your study.

Cost Segregation Report Example

While looking for a provider, a building owner may look online for a cost segregation report example. Unfortunately, like the buildings that the reports are based on, each cost segregation report is highly customized. For many building owners wondering, “Can I do my own cost segregation study?” the answer is similar. Since cost segregation studies are based on years of tax law and court cases, a quality study requires someone with expertise and experience. In fact, the IRS states that they prefer cost segregation studies to be completed by experts with knowledge of both engineering and tax. That said, most firms have proprietary cost segregation calculators that can provide an estimate of what a cost segregation study could save if it was completed accurately. The cost segregation professional then uses tax law, including revenue procedure 87-56, to come up with their report. Revenue procedure 87-56 almost acts like a cost segregation depreciation guide, providing lives for different types of industries. This then allows the cost segregation teams to produce the cost segregation report for different types of industries. Because of this, you could receive a cost segregation study on a single family home or on an office building as long as the property was held for income-producing purposes.

Commercial Real Estate Cost Segregation

When is cost segregation needed? Cost segregation studies can be completed for multiple types of industries. However, it is most commonly thought of as it relates to commercial real estate. Commercial real estate cost segregation studies can be completed for multiple types of assets as long as they are held for income-producing purposes. Some common cost segregation categories include office properties, manufacturing, retail, and other real estate categories. Cost segregation on real estate is recognized by the IRS as a way to reduce taxable income and provide tax relief for taxpayers. Many times cost segregation studies are utilized by businesses but, in some cases, can be used by individual investors as well. A cost segregation study on real estate held by an individual investor is often a great planning tool but requires understanding passive limitations and other tax implications. While it is common to complete cost segregation for real estate, the IRS does require that these studies follow strict standards. Additionally, it is important for the taxpayer to understand all of the tax implications related to the study and how other issues on their tax return could affect the results of the analysis.

Cost Segregation Study Residential Rental Property

A growing area of real estate investment is short-term residential housing. This is led by the growth of certain websites, including VRBO and Airbnb. This is leading more and more casual investors into investing in residential real estate. This brings up the question of how cost segregation on residential rental property can save on taxes. Additionally, some of these smaller investors may wonder if I can do my own cost segregation study. The good news is that the IRS considers cost segregation on residential real estate a viable option. However, rarely can someone complete their own cost segregation study. However, by reaching out to a reputable cost segregation provider, they can put your specific real estate investment into a cost segregation calculator to determine how much taxes they can save you. A good cost segregation real estate example would be with an investor investing in beach condominiums. These could lead to significant savings. However, it is important to look at passive limitations for certain investors. A cost segregation for a real estate professional would be much more valuable than a cost segregation study for a doctor investing in real estate. Cost segregation for real estate professionals does not have the same passive loss limitations.

Cost Segregation Study Residential Rental Property IRS

As previously discussed, residential rental property is a growing area of investment. “Cost segregation residential rental property IRS” are terms that are commonly used together because there can be many questions surrounding but cost segregation on residential rental property meets IRS requirements as long as the study is done by a qualified cost segregation professional. These professionals can let a taxpayer know upfront if they can save money by utilizing proprietary cost segregation calculators to estimate tax savings. However, it cannot be stressed enough that not all investors will qualify. Due to passive loss limitations, cost segregation for real estate professionals that are active in their business is much more valuable than ones done for passive investors. This is due to something called passive loss limitations. The real estate professional could complete cost segregation studies on strip malls or cost segregation on single family homes. A good cost segregation study on residential rental property example would be a recent study we completed. In this recent analysis, a study was completed on a recently purchased $1 million beachfront home. The study generated $200,000 in losses in the first year. Since the investor was a real estate professional, they were not limited to passive income and were able to absorb all of the losses in one tax year.

IRS Cost Segregation Guide

Often when considering cost segregation, taxpayers want to know what the IRS’s opinion is of cost segregation. The IRS has published a cost segregation guide to let people know what they are looking for in a quality study. While this was not originally published for individuals, it is publicly available. This guide is known as the cost segregation audit techniques guide. This guide walks through what is needed to complete a quality cost segregation report. They include in this a discussion on who can complete a cost segregation study. While there is no national cost segregation certification, the IRS states that a study completed by someone with knowledge of both engineering and taxation is more valuable than one done by someone without this knowledge. In the audit guide, the IRS provides a cost segregation depreciation guide walking through their opinions on different assets. They also provide industry guidance, including an IRS cost segregation guide for restaurants, casinos, and other industries. While the guide can provide information as to what the IRS is thinking, it cannot be cited as a precedent. However, this guidance provides valuable information as to how the IRS will look at a cost segregation study under audit.