For multifamily property owners, maximizing cash flow and reducing tax liabilities are key priorities. One of the most effective strategies to achieve these goals is through cost segregation. This powerful tax planning tool allows property owners to accelerate depreciation on certain building components, leading to significant tax savings.
Defining Cost Segregation?
Cost segregation is a tax strategy that involves identifying and reclassifying personal property assets and land improvements within a building to shorter depreciation periods. Instead of depreciating the entire property over 27.5 years (the standard for residential rental properties), cost segregation allows components such as flooring, cabinetry, appliances, and landscaping to be depreciated over 5, 7, or 15 years. This accelerates deductions and provides immediate tax benefits.
How Multifamily Property Owners Benefit from Cost Segregation
1. Increased Cash Flow
By accelerating depreciation, property owners can reduce their taxable income and free up capital for reinvestment. This increased cash flow can be used for property improvements, acquisitions, or debt reduction.
2. Significant Tax Savings
Through bonus depreciation, property owners can write off a substantial portion of qualified assets in the first year. Currently, 80% bonus depreciation is available for assets placed in service in 2024, which makes cost segregation even more valuable.
3. Enhanced ROI for Investors
For those who own multifamily properties as part of an investment portfolio, reducing taxable income enhances overall returns. Investors benefit from increased distributions and higher profitability.
4. Section 1031 Exchange Benefits
Cost segregation, when paired with a 1031 exchange, can maximize tax deferrals. By utilizing cost segregation on a newly acquired property, owners can accelerate depreciation and offset taxable gains from a previous sale.
5. Retroactive Tax Savings
Property owners who haven’t conducted a cost segregation study in prior years can perform a lookback study and claim missed depreciation deductions without amending past tax returns. This can result in immediate tax savings.
Is Cost Segregation Right for Your Multifamily Property?
Cost segregation is ideal for owners of newly constructed, purchased, or renovated multifamily properties. The larger the property and the more extensive the assets, the greater the potential benefits.
To determine if a cost segregation study makes sense for your multifamily property, consult with experts who specialize in engineering-based studies. With the right approach, you can optimize your tax strategy, increase cash flow, and maximize your property’s financial potential.
Unlock the full potential of your multifamily investment—contact us at CSSI today!