Cost Segregation Myths & Facts
Tax reduction and tax deferral uses cost segregation for its generation. However, because of limited understanding of this tool, it is not well understood by most real estate investors and by many tax preparers. Because the root cause is limited understanding regarding cost segregation and how it provides tax reduction, there is a limited dissemination of factual data on the subject.
The most prevalent myths include:
Cost segregation when properly computed, provides tax reduction by translating income which would have been taxed at the ordinary income rate (35% maximum) to income taxed at the capital gains rate (15% maximum). When it concerns ownership of properties, cost segregation generates additional depreciation real estate investors can use to shelter income from the property or other sources. In many cases, this income would have been taxed at 35%, if cost segregation wasn’t employed.
It is the responsibility of the property owner and tax preparer to collectively allocate the sales price upon sale. In the purchase of short-life property such as carpet, vinyl tile and paving, cost has depreciated and the market value of these assets (at the time of sale) equals their depreciated cost basis. When this is the case, the additional depreciation will be taxed based on the capital gains rate. Therefore, the real estate investor gains both tax reduction and tax deferral.
Before cost segregation is used to study $20,000 to $50,000 per property and was only financially feasible for properties with a cost basis of at least $10 million. But now, most people can avail because fees for cost segregation studies are now much lower. Ordering a cost segregation study makes sense if the cost basis of improvements is at least $500,000. The first year tax reduction in most cases is at least two to four times the fee for the study.
To say that cost segregation studies is a risky scheme is a myth and is completely inaccurate. A cost segregation study that is properly prepared is encouraged by the IRS since it generates more accurate accounting. The Audit Techniques Guide is a manual that discusses the background and proper methodology for a cost segregation report.
Both the advisors and appraisers (who perform cost segregation studies) are expected to have studied and understood the contents embodied in the Audit Techniques Guide. Studies done on cost segregation are encouraged by the IRS. The IRS staff in private correspondence has indicated that a cost segregation study does not increase the change of an audit.
Ignoring the myths, the real estate investor or those who use real estate in their business, should obtain a free preliminary analysis to determine if they could benefit from a cost segregation study and increase their tax reductions and tax deductions.
Cost segregation, no matter what size the market is, produces tax deductions and reduces federal income taxes across the country. Written below are a few examples showing cost segregation generations by meaningful tax deductions.
Cost segregation samples for virtually all property types produces tax deductions.
Property Type:
Industry:
Preparing taxes and giving consulting advice, Augustus McMillan is already educated in doing these. One of his firm’s, McMillan Consulting’s http://macadvises.com [email protected] specializes on real estate.
Spectrum Enterprises, LLC was created by investors for investors. We recognize the importance of maximizing cash flow and profitability in your real estate endeavors. Spectrum specializes in a myriad of services, which consists of investments, consulting, sales and property management. www.spectrum-ent.net
The most prevalent myths include:
- Most people believe that cost segregation does not provide tax reduction, only tax deferral.
- The process of cost segregation is too expensive. It can only be done for properties with a cost basis of $10 to $20 million or more.
- Doing cost segregation is risky; a tax shelter is likely to cause an audit.
Cost segregation when properly computed, provides tax reduction by translating income which would have been taxed at the ordinary income rate (35% maximum) to income taxed at the capital gains rate (15% maximum). When it concerns ownership of properties, cost segregation generates additional depreciation real estate investors can use to shelter income from the property or other sources. In many cases, this income would have been taxed at 35%, if cost segregation wasn’t employed.
It is the responsibility of the property owner and tax preparer to collectively allocate the sales price upon sale. In the purchase of short-life property such as carpet, vinyl tile and paving, cost has depreciated and the market value of these assets (at the time of sale) equals their depreciated cost basis. When this is the case, the additional depreciation will be taxed based on the capital gains rate. Therefore, the real estate investor gains both tax reduction and tax deferral.
Before cost segregation is used to study $20,000 to $50,000 per property and was only financially feasible for properties with a cost basis of at least $10 million. But now, most people can avail because fees for cost segregation studies are now much lower. Ordering a cost segregation study makes sense if the cost basis of improvements is at least $500,000. The first year tax reduction in most cases is at least two to four times the fee for the study.
To say that cost segregation studies is a risky scheme is a myth and is completely inaccurate. A cost segregation study that is properly prepared is encouraged by the IRS since it generates more accurate accounting. The Audit Techniques Guide is a manual that discusses the background and proper methodology for a cost segregation report.
Both the advisors and appraisers (who perform cost segregation studies) are expected to have studied and understood the contents embodied in the Audit Techniques Guide. Studies done on cost segregation are encouraged by the IRS. The IRS staff in private correspondence has indicated that a cost segregation study does not increase the change of an audit.
Ignoring the myths, the real estate investor or those who use real estate in their business, should obtain a free preliminary analysis to determine if they could benefit from a cost segregation study and increase their tax reductions and tax deductions.
Cost segregation, no matter what size the market is, produces tax deductions and reduces federal income taxes across the country. Written below are a few examples showing cost segregation generations by meaningful tax deductions.
Cost segregation samples for virtually all property types produces tax deductions.
Property Type:
- Auto dealer
- Convenience store
- Department store
- Drugstore
- Fast food restaurant
- Land
- Medical facility
- Multifamily
- Self-storage
- Service center warehouse
Industry:
- Apparel manufacturing
- Automotive parts distributors
- Building supply dealers
- Electrical component manufacturing
- Frozen food manufacturing
- Golf courses and country clubs
- Plastic and rubber products manufacturing
- Publishers
- Textile product mills
- Wood product manufacturing
Preparing taxes and giving consulting advice, Augustus McMillan is already educated in doing these. One of his firm’s, McMillan Consulting’s http://macadvises.com [email protected] specializes on real estate.
Spectrum Enterprises, LLC was created by investors for investors. We recognize the importance of maximizing cash flow and profitability in your real estate endeavors. Spectrum specializes in a myriad of services, which consists of investments, consulting, sales and property management. www.spectrum-ent.net
