Business owners may be able to see substantial tax savings faster by conducting cost segregation studies. These studies identify property components and their costs, allowing you to maximize current depreciation deductions by using shorter lives and speeding up depreciation rates available for the qualifying parts of the property.

Depreciation rules

Buildings generally are depreciated over 27.5 years (residential rental) or 39 years (commercial) using the straight-line method. This recovery period applies to real property, which includes buildings as well as structural components such as walls, concrete floors, paint, windows, ceilings and HVAC systems.

You may be able to write off some parts of a property faster than 27.5 or 39 years by separating the parts that aren’t structural. In some cases, you can use a 5-, 7- or 15-year rate of depreciation. There are no hard-and-fast rules for distinguishing personal property eligible for accelerated depreciation from structural components that are depreciated as part of a building. Various factors come into play, including how the property is affixed to the building, whether it’s designed to remain in place permanently, and how difficult it would be to move or remove.

Examples of personal property that can qualify for a faster depreciation deduction include:

  • Decorative fixtures,
  • Cabinets, shelves,
  • Movable wall partitions, and
  • Carpeting.

You can also depreciate the allocated portion of certain capitalized indirect or overhead costs — such as architectural and engineering fees. And land improvements that you can isolate with a cost segregation study include parking lots, sidewalks, fences and landscaping.

Consider a cost segregation study when you buy, build or remodel — or when you’ve done so within the last few years. Be aware that the overall benefits may be limited in certain circumstances, such as when a business is subject to the alternative minimum tax or located in a state that doesn’t follow federal depreciation rules. Passive activity loss rules can also defer benefits.

A cost segregation study can be an excellent way for gaining faster write-offs on real estate and construction projects. Contact us to help determine whether you can benefit.

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