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Cost Segregation Studies Prove Beneficial in a Post-COVID Economy

July 29, 2021

Like most industries, real estate did not escape the COVID-19 pandemic unscathed, and commercial building owners in particular are looking for ways to maximize savings. Cost segregation studies have long been an effective way to accomplish this, but, thanks to the passing of recent legislation, the value of a cost segregation study has never been higher.

What Is a Cost Segregation Study?

Tax laws generally allow depreciation of certain kinds of property at a rate faster than what is allowed for buildings. Whether building a new building, acquiring an existing facility, or renovating an old one, a cost segregation study identifies costs in a building project that may be categorized as personal property or land improvements, rather than as building costs. With a shorter depreciation period, current depreciation deductions are increased, thereby lowering your current tax liability and increasing your current tax savings.

How It Works

By reallocating assets out of the building basis (which is depreciated straight-line over 27.5 or 39 years) into the more favorable asset classifications of land improvements and personal property (which are both eligible for 100% bonus depreciation for federal tax purposes), building owners are able to increase their current-year depreciation and use that depreciation to lower current-year taxable income. This can ultimately lower tax liability thereby improving the bottom line.

Why Now?

The Tax Cuts and Jobs Act (TCJA) of 2017 increased bonus depreciation on assets to 100% through 2022. (This rate then declines each year until 2026.) What’s more, the TCJA broadened the provision to apply to acquired properties. Then, with the passing of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020, a technical error in the original TCJA law was corrected, which resulted in Qualified Improvement Property (QIP) being eligible for that same 100% bonus depreciation.

In short, cost segregation studies now allow building owners to accelerate depreciable assets AND increase the speed of those deductions through bonus depreciation.

How We Can Help

With decades of experience in the cost segregation field, KSM is well positioned to assist with cost segregation needs. From construction of a new building to acquisition or renovation of an existing building, our team of professionals can assess whether a cost segregation study could be beneficial. Contact us today to learn more.

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