Have you purchased property recently? If so, are you interested in lowering your taxable income? A cost segregation study can help lower your taxable income in the year of completing a study, which generally is the year the property is placed in service.

What is Cost Segregation?

Cost segregation is a method of accelerating depreciation on residential rental and commercial property that is placed in service for revenue generation. Cost segregation is a very useful tool for property owners who are looking to reduce their taxable income in a given tax year. A cost segregation study can identify property that is eligible to accelerate depreciation by identifying them as either a 5-, 7-, or 15-year property. Currently, pending any sitting legislation passing in Congress (see below), these same property classes are eligible for 60% bonus depreciation in year one, further lowering the taxable income in the first year of completing a study.

Tax Cuts & Jobs Act (TCJA)

The TCJA passed in 2017 and was instrumental in the introduction of bonus depreciation. Under the TCJA taxpayers were allowed 100% depreciation expense for business property that was added and then placed into service anytime between October 2017 and December 31, 2022. After the 2022 tax year, the bonus sunset at a rate of 20% decrease per year in bonus depreciation. Therefore, placed in service properties for 2023 would be at 80%, 2024 at 60%, 2025 at 40%, 2026 at 20%, and 2027 with no allowance for bonus depreciation.

However, with the new makeup of the House and Senate, it appears that many of the incentives set forth in the TCJA will be extended in 2025, with a push to return bonus depreciation to 100% with no sunsetting being made. The House of Representatives voted to approve this in early 2024 before it stalled in the Senate.

Who is eligible?

Anyone who purchased property after September 2020 that is generating revenue. This could be a residential rental property or a commercial rental property. This could also be any building owned by a company who uses that building for business activities.

When should I have a cost segregation study done?

This is the question that abip’s team will help you answer. The great thing about cost segregation is that you can complete a study at any time between the placed-in-service date and then 7 years thereafter. Generally, the biggest benefit will be seen in the year that the building is placed in service. For example, if you purchased a residential property and listed it for use in June of 2024, doing a cost segregation study for 2024’s tax return would generally net you the most benefit. However, this might not ring true for every taxpayer due to cash flow circumstances.

If you placed a property in service in 2022 or 2023, there is still a great opportunity for a benefit to be captured by doing a cost segregation study. Properties that were placed in service prior to 2020 will start to see a significant decline in the return on the cost segregation study as the 5-year property goes away, yet this does not mean it is not beneficial. abip’s team will help you decide when the best time is for you to complete a study based on the facts and circumstances of each taxpayer.

What are some examples?

One case study is of a warehouse purchased for $9,200,000 and placed in service in 2023. Through a cost segregation study, the taxpayer was able to identify $3,169,736 in additional tax deductions in year 1 of their accelerated depreciation (see Figure 1), yielding a 34% benefit in the first year. Included in this breakout was 5-year property such as cabinetry and flooring, 7-year property such as site lighting and building lighting, and 15-year property such as paving and canopies.

What will abip do?

Our strategic tax advisory team will gather pertinent information about the property and then give you an estimated amount of tax savings. Then, they will conduct an on-site verification of the property, identifying and documenting the assets based on the IRS’ audit technique guide regarding cost segregation- ensuring that every component of the cost segregation study will be in line with what the IRS is looking for in accelerated depreciation deductions. Finally, the team will segregate the costs based on the assets included on the property & provide you with a final report detailing how all the costs are broken out based on the classifications provided in § 168 and Publication 946.

Important things to remember:

• Land values are excluded from cost segregation studies as land values are not depreciable assets
• We will need documentation such as blueprints, purchase orders, & appraisals.
• Consulting with the abip tax strategic advisory team is crucial to ensure you understand the eligibility requirements and maximize your tax benefits.

By conducting a cost segregation study, you can see significant benefits to your taxable income in year one. Contact abip’s strategic tax advisory team at tax_ci@abipcpa.com to get started on your property.