Depreciation using Cost Segregation

The following information was graciously provided by Jeff Pinkerton of U.S. Cost Segregation.

You may be able to easily take cash out of the investment properties you currently own. It's actually quite easy.

You're probably depreciating those properties at 27.5 years (if residential) or 39 years (if commercial). There is a section of the IRS code that allows you to depreciate certain assets within that building at 15 or 7 or even 5 years. That faster depreciation means more of a tax writeoff which means less taxes. You can even go back in time and recapture this 'lost' depreciation that you haven't been taking.

The technique is called cost segregation analysis and has been a part of the tax law for the past decade. This analysis needs to be performed by a qualified engineering firm, which identifies and "costs out" those assets which qualify for faster depreciation. For example, carpet, electrical for computer equipment and decorative elements can be depreciated over 5 years. Site utilities, paving and landscaping can be depreciated over 15 years.

Imagine you purchased a 15 year old four-plex five years ago and paid $500,000 for it. Assume 20% of that went to land, that means you are depreciating $400,000 over 27.5 years (that's 3.6% per year). But of that $400,000 you paid for the building itself, how much went to the carpet? To the plumbing and kitchen fixtures? To the interior non-load bearing walls?

The answer, of course, is "I don't know". Cost segregation analysis answers those questions and provides data your CPA can use to apply the deductions you've been missing. Extra deductions means less taxes. In fact, it's common that 25% of the assets in an apartment can be depreciated more rapidly. Compare that with the 3.6% you're depreciating now and you can see how this technique can benefit you.

Further, leasehold improvements have even a more profound impact. Typically about 50% of those assets are amenable to accelerated depreciation. This means that you can write off the cost of the original carpet that came with the building, as well as the new carpet you installed. Similarly the new cabinets, the new bathroom and the new electrical wiring and so forth.

This is a time-tested and IRS-accepted method of helping improve your cash flow.

For more information, contact Jeff at 303.694.3924 or visit their website at U.S. Cost Segregation Services.