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Cost Segregation - Tax Strategies for the New Year

Cost Segregation Studies offer real estate investors the opportunity to increase post-tax cash flows from their property by accelerating depreciation expense and deferring income taxes.

By Jonathan Hipp | Updated on December 28, 2011

Cost Segregation Studies offer real estate investors the opportunity to increase post-tax cash flows from their property by accelerating depreciation expense and deferring income taxes. The study works by assessing all the components of a property and reallocating value that had been originally attributed to the building as either personal property or site improvements. This takes advantage of the fact that personal property and site improvements can both be depreciated over a much shorter time span than real property. Specifically, personal property is depreciated over 5 or 7 years and site improvements are depreciated over 15 years, as compared to real property that is depreciated over 27.5 or 39 years.

Many smaller scale investors (as well as institutional buyers) like to invest in single tenant net lease (STNL) assets because of the lack of managerial duties for the owner. As previously mentioned, these properties are normally good candidates for Cost Segregation Studies. In a typical pharmacy, 8-15% of the value might be able to be reallocated to personal property with 5 or 7 year depreciation lives. With a bank, this could be 15-25%. Other STNL properties will fall somewhere in between. In addition, site improvements with 15 year depreciation lives are considered. 

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