Skip to content

The World's 1st Blockchain-enabled Title & Escrow

Cost Segregation: 3 Things You Did Not Know

Cost segregation: 3 things you didn’t know

Many believe that multifamily investing is a fast way to achieve financial freedom in the real estate world. However, all of that extra income comes with higher taxes. Cost segregation is a solid strategy to alleviate the tax burden from all of that extra passive income. Below are 3 things that you probably did not know about this money-saving tax strategy.

Reducing Tax Liability with Cost Segregation

Cost segregation speeds up the depreciation of some components of properties. Using this tax planning strategy, real estate investors can get cash flow up front and reduce their current tax liabilities. Multifamily units generally depreciate over 27.5 years. With cost segregation, some components of the property depreciate on a faster track, usually between 5-15 years. For example, carpeting and a kitchen stove can both depreciate in 5 years. Check your local tax laws to know when you can use these additional deductions.

Hidden Costs of Cost Segregation

Be aware that following this tax strategy can cost you money up front. It can cost between 5 and 10 thousand dollars for a specialized team to assess your property. Always check with your CPA before hiring a team to make sure this is the right strategy for your situation. When thinking about cost segregation, note that you might only reap benefits under certain designations, such as the ones below.

  • You or your spouse are a real estate professional
  • Your W-2 income falls below $150,000
  • You sell the property

Cost Segregation Does Not Follow the Calendar Year

Unlike other tax strategies, cost segregation does not have to be determined by December 31st. This can be done in March or April for the prior tax year. In fact, it can be done by the current owners at any point during the time of ownership.

You can perform an analysis of this tax strategy across all of the rental properties in your portfolio. So, any savings that you accumulate on one property with this strategy can offset other properties; it can also offset your active income (W-2 income), especially if you can meet the real estate professional designation.

As with all things tax-related, double-check everything with your CPA or tax professional to ensure this strategy will benefit you. The CPA or tax professional will be able to accurately assess your finances and can walk you through the process.

Related Articles