Cost Segregation and Bonus Depreciation

Cost Segregation combined with Bonus Depreciation is the key to maximizing tax savings…

First, what is a Cost Segregation study?

Cost segregation study: breaks down a property into components and identifies the components of the property that can be depreciated over 5, 7 and 15 years. The components that are in the 5, 7, 15-year category (qualified assets) can account for approximately 25% of the property purchase price (cost of land is excluded). Using 100% Bonus Depreciation you can deduct the 25% identified via the Cost Segregation study, in the first year of purchase. 

So, as a general calculation you can deduct approximately 25% of the property purchase price in the 1st year of purchase when you combine a cost segregation study with Bonus depreciation. In years past depreciation would be spread over 27.5 years (residential) to 39 years (commercial).

100% Bonus Depreciation

100% Bonus Depreciation: allows businesses to expense 100% of the components identified in the cost segregation study (5, 7, 15-year components) in the first year they acquire them, rather than depreciating them over a period of years.

This change was put into effect with The Tax Cut and Jobs Act (TCJA) from 2017 which added provisions to the IRS code Section 179 deduction, allowing business owners to take a bonus depreciation of 100% for qualified assets (Identified by a Cost Segregation Study) in the first year.  In years prior, bonus depreciation was limited to 50%. The 100% Bonus deprecation will begin fading out in 2023. 

100 percent After September 27, 2017, and before January 1, 2023

80 percent After December 31, 2022, and before January 1, 2024

60 percent After December 31, 2023, and before January 1, 2025

40 percent After December 31, 2024, and before January 1, 2026

20 percent After December 31, 2025, and before January 1, 2027

None After December 31, 2026

An Example of Cost Segregation combined with Bonus Depreciation: 

You purchase a property for $400,000 and perform a cost segregation study. 

The cost segregation study identifies that $100,000 worth of the property’s components fall into the 5, 7, 15-year category and qualify for bonus depreciation.

After discussing with your CPA you elect to take 100% bonus depreciation of the cost segregated components for the tax year that you acquired the property.

If you have REPS or are managing a Short-Term Rental Business you can take a depreciation expense of $100,000 resulting in a tax saving of $22,000 to $37,000 depending on your Federal tax bracket.

If you placed a 10% down payment, $40,000, to purchase your $400,000 property, then the tax savings you achieved ($37,000) via your cost segregation study and bonus depreciation are nearly equal to your down payment.  As you can see this can result in a great return on your investment.

This is an unbelievable opportunity and incentives real estate investment.  Read about these principles and discuss with your CPA, financial advisors and investment team about these topics.

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