Tax deferral is a key benefit of cs; However, a popular misconception about CS is that it is only used for tax deferral, not tax reduction. The subject of tax deferrals and tax reductions is misunderstood by sophisticated real estate investors and tax professionals alike. The consequences of this misinformation are unfortunate, as many real estate investors forego tax deductions, which would result in material income tax deductions and tax deferrals.
It generates both the deferral of income tax and the reduction of income tax. The income tax deferral is effective since higher depreciation is taken in the first few years of real estate ownership. A reduction in personal income tax is obtained since more income is taxed at the capital gains rate (maximum 15% compared to the ordinary personal income tax rate of 35%). Tax deferral delays the payment of taxes until a future date.
The mechanics of tax deferral and tax reduction calculations are simple but not intuitive. Many accounting professionals believe that the only benefit is tax deferral until they consider the mechanics or recognize the gain on sale. The tax deferral is not the only benefit to realize.
The following example illustrates the mechanics of recognizing the gain on the sale and the tax deferral and tax deduction benefits derived from a cost segregation study.
John bought an apartment building five years ago. Accumulated depreciation during ownership was $600,000 based on the results of a cost segregation study. Accumulated depreciation would have been $400,000 without the cost segregation study.
The cost segregation study identifies five-, seven-, and 15-year-old properties as well as 39-year-old properties and land. John’s tax preparer analyzes the condition of the property for five, seven and 15 years at the time of sale. They agree that the value of short-lived property (five, seven, and 15 years) is the same as its depreciated cost basis. Therefore, the tax rate for the additional $200,000 of depreciation is the capital gains rate.
During each year of ownership, John received an additional $40,000 of depreciation as a result of the cost segregation study. This additional depreciation reduced his federal income taxes by $14,000 per year ($40,000 X 35%) and by $70,000 over five years. When selling the property, the capital gains tax is increased by $30,000 ($200,000 X 15%). The net tax savings is $40,000 ($70,000 — $30,000).
Cost segregation provides both tax relief and tax deferral.
Cost segregation produces tax breaks and reduces federal income taxes across the country and in markets of all sizes. Below are just a few examples of where cost segregation results in significant tax deductions.
City:
Orlando, Florida
New York, NY
Houston, TX
San Francisco, CA
Los Angeles California
Boston, MA
Atlanta Georgia
New Orleans, LA
Miami Florida
Bridgeport, CT
Portland, Oregon
Stockton, Calif.
Santa Rosa, Calif.
Little Rock, AR
Charlotte, N.C.
Palm Bay, Florida
austin, texas
Boise, ID.
Durham, North Carolina
Providence, Rhode Island
Baton Rouge, LA
Detroit, MI
Wichita, Kansas
Omaha, N.E.
San Jose, California
Oxnard, Calif.
Greenville, South Carolina
Lancaster, Pennsylvania
Poughkeepsie, New York
Nashville, Tennessee
Cost segregation produces tax deductions for virtually all types of property.
Kind of property:
Deposit
apartments
Motel
discount store
Country club
mall
used car lot
department store
truck stop
Storage
Almost every industry, including the following, can generate profitable tax deductions through cost segregation.
Industry:
storage and storage
Non-durable goods wholesalers
Electronics and appliance stores
metal fabricated products
Manufacture of electrical components
textile factories
printing activities
truck transport
automotive parts distributors
Chemical manufacturing
