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Strategies for Cost Segregation Success

Oct 24, 2023

EisnerAmper and Capstan Tax Strategies explore the versatile applications of cost segregation in real estate, emphasizing its relevance throughout the property lifecycle and as a strategic planning tool for renovations. Additionally, we delve into the implications of changing bonus rates on the timing of cost segregation, providing valuable insights for real estate investors and industry professionals.

Cost segregation supports tax strategies at every stage. See how with our life cycle of real estate infographic.

In the world of real estate, financial optimization and investment strategies are key. In this new series of Breaking Ground, we're diving deep into the world of cost segregation and how it can be a powerful tool to unlock the full financial potential of your commercial property. 

Cost Segregation at Any Stage of the Real Estate Lifecycle

One common misconception is that cost segregation is only relevant for new construction or property acquisitions. However, cost segregation can be applied throughout the entire lifecycle of a property. This means you should consider it from the very beginning when planning a project, focusing on optimizing materials eligible for accelerated depreciation.

 It also remains a valuable strategy when you're renovating or repositioning your property. Our speakers highlight the concept of qualified improvement property and its connection to bonus depreciation. Renovating an interior space can open opportunities for accelerated depreciation, writing off the remaining depreciable basis of assets being removed, and fully leveraging the Tangible Property Regulations. 

The Best Time to Undertake a Cost Segregation Study

The best time to undertake a cost segregation study depends on various factors such as the owner’s long-term plans, how long the property has been in service, and the financial metrics of the property at the time of acquisition. 

For instance, if you're already operating at a loss in a given year, it might make sense to delay your cost segregation study until the following year. By performing a look-back study, owners catch up depreciation benefits that have been missed. 

Lookback Studies for Cost Segregation

The look-back study enables property owners to go “back in time” and retroactively capture depreciation benefits as if a cost segregation study had been performed on day one. 

Importantly, there's no need to amend tax returns in a look-back study. Completing a Form 3115 Change in Accounting Method is all that’s required.  This approach can be particularly effective if you've become cash flow positive and are looking for ways to offset income. 

For property owners with multiple assets, strategically planning cost segregation studies across several years can help ensure a more efficient use of the benefits.

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Avi Jacob

Avi Jacob is a Compliance Tax Manager in the Real Estate Services Group.

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