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Cost segregation is an area of the tax code often overlooked by smaller (and even larger) real estate investors, funds, or businesses in general. I will explain these concepts as they relate to those who own rental income properties, since these are the most common taxpayer types reaching out for assistance. However, these exact concepts also apply to businesses that have any type of larger capital assets, such as manufacturers, those owning warehouse or office space, those purchasing facilities with various components, etc.
The basic concept is that each business use asset may have more than one component and each component may have its own measure of “useful life” for depreciation purposes.
For instance, a residential rental home we all know is depreciated over a life of 27.5 years as per the current US tax code. However, the roof of this home has a useful life of only 5 years. The refrigerator has a life of 7. The electrical breakers 10.
This presents an opportunity for accelerating depreciation. Rather than getting the tax benefit over 27.5 years for the entire investment, we can depreciate certain components faster.
What advantage does this have? If I have a property showing a profit but want to reduce this taxable profit, accelerating deprecation may do the trick. This is the major “pro” here.
What are the cons? A few are listed below:
For business owners or those who are in the real estate business as “qualified real estate professionals,” you can take these losses right away, so don’t hold back!
For more information, please contact Dimov Associates at the contact below. We are more than happy to assist.
Call us today at (833) 829-1120, email us at hello@dimovtax.com, or fill out the form and we’ll get in touch immediately.
Dimov Tax is rated 5 stars on all major review platforms including Google, Yelp, Facebook, Angie’s List, Better Business Bureau, TaxBuzz, Thumbtack, Upwork, Bark, and much more.