August 15, 2024

Top 10 Benefits of Cost Segregation for Commercial Property Owners

When it comes to managing commercial real estate investments, property owners are always on the lookout for strategies that enhance their financial performance.

One such strategy gaining considerable attention is cost segregation studies. 

“As we’ve seen with our clients time and time again, this tax planning tool helps property owners optimize their depreciation schedules and has given them a number of significant financial advantages,” says Brian Shin, CSSI Chief Financial Officer.

Did we pique your interest?

Well, here’s a closer look at the top 10 benefits of cost segregation studies for commercial property owners and why this approach is increasingly popular.

1. Accelerated Depreciation Deductions

Traditionally, commercial properties are depreciated over 39 years, but a cost segregation study allows for the reclassification of certain assets into shorter-lived categories, such as five, seven, or 15 years.

“This means you can claim larger depreciation deductions sooner, which reduces your taxable income in the early years of property ownership,” notes Shin.

2. Increased Cash Flow

By lowering your taxable income, you can significantly boost your cash flow.

This extra money can be reinvested into the property, used to reduce debt, or directed toward new investment opportunities.

Improved cash flow also provides you with greater operational flexibility, the chance to seize emerging growth opportunities, and the ability to better adapt to market changes.

3. Enhanced Return on Investment (ROI)

“By accelerating depreciation deductions, cost segregation can significantly enhance your return on investment,” says Shin.

“This makes the property a more appealing investment, potentially leading to increased profits and better overall performance.”

Additionally, the improved cash flow can make your property more competitive in the market, attracting greater investor interest and leading to better long-term financial outcomes.

4. Tax Savings Through Bonus Depreciation

Recent updates to tax laws, notably the Tax Cuts and Jobs Act (TCJA), have added bonus depreciation provisions that let property owners deduct 100% of the cost of qualifying property in the year it’s placed in service.

When paired with a cost segregation study, this provision can lead to significant tax savings by allowing for even larger upfront deductions.

5. Strategic Tax Planning

A cost segregation study analyzes a property’s components to aid in strategic tax planning.

By identifying which elements can be depreciated over shorter periods, you can optimize your tax strategy and better manage your taxable income.

6. Retroactive Tax Benefits

Cost segregation studies aren’t limited to newly acquired properties. They can also be applied retroactively to existing properties.

Shin explains: “If you’ve owned a commercial property for an extended period, you can conduct a cost segregation study and potentially recapture missed depreciation deductions by filing amended tax returns.’

7. Enhanced Real Estate Portfolio Management

By applying cost segregation to each of your properties, you can optimize your overall tax strategy across your portfolio.

This holistic approach can lead to improved financial performance and more efficient management of your real estate portfolio, while supporting better investment decisions and growth strategies.

8. New Constructions and Renovation Benefits

Cost segregation is great for those engaging in new constructions and major renovations. 

“During these projects, a substantial portion of your investment goes into components that can be depreciated over shorter periods, such as landscaping, interior finishes, and specialized equipment,” Shin says. “When we conduct a cost segregation study during or after construction, we can ensure these costs are identified and maximized.”

9. Boost for Small Business Owners

As a small business owner with commercial real estate, you can greatly benefit from cost segregation studies.

For smaller properties or recent acquisitions and renovations, accelerating depreciation can offer immediate financial relief.

This increased cash flow can support your operations, enable capital improvements, and facilitate growth opportunities.

10. Optimization for Fix-and-Flip Investments

As a fix-and-flip investor, you can leverage cost segregation studies to enhance your investment strategy.

By applying cost segregation, you can accelerate depreciation on renovation costs, which reduces your taxable income and boosts profitability on each flip.

This strategic approach can lead to higher returns on individual projects and a more effective investment strategy.

Are you getting the most out of your properties? 

“Whether you have newly acquired properties, are engaged in major renovations, or are managing a diverse real estate portfolio, cost segregation is a powerful tool in your arsenal.”

Shin explains. “ If you’re a property owner or investor, let’s talk about integrating this strategy into your overall financial planning.”