A cost segregation study is a tax strategy that involves analyzing a property to identify and reclassify certain components (like fixtures, plumbing, or electrical systems) as personal property or shorter-life assets. This allows property owners to accelerate depreciation deductions, reducing taxable income and improving cash flow in the early years of ownership.
Details
Reduces Taxable Income
Depreciation is a non-cash expense that lowers the taxable income from a rental property, allowing investors to keep more of their income.
Offsets Passive Income
For passive investors, depreciation can offset passive income (e.g., rental income) by generating passive losses, reducing or eliminating taxes on that income. If the amount, of losses exceeds the income generating by the property generating the losses, the overflow losses can be used
Defers Taxes
By reducing taxable income now, depreciation defers taxes until the property is sold, potentially allowing investors to reinvest more capital in the meantime.
Cost Segregation for Faster Deductions
Investors can use cost segregation to accelerate depreciation on certain property components (e.g., fixtures, landscaping), increasing deductions in early years.
