A cost segregation study can be beneficial for real estate owners at various stages of property ownership, including during the acquisition, construction, renovation, or sale of a property. However, the optimal time to conduct a cost segregation study may depend on several factors, including:

1. Property size and value: For smaller properties, the cost of a cost segregation study may outweigh the potential tax savings.

2. Tax liability: If a property owner has a high tax liability, they may benefit more from accelerating their depreciation deductions through cost segregation.

3. Property age: If you have owned a commercial building for 20 years, it is halfway through its depreciation life, and thus the cost segregation will provide half the benefit.

4. Future plans for the property: If a property owner plans to hold the property for two years.

5. Before improvements or renovations: If a property owner plans to make significant improvements or renovations to their property, a cost segregation study will be particularly valuable, as it can help to identify shorter-lived assets that can be written off when removed, and depreciated more quickly when installed.

In summary, the decision to conduct a cost segregation study should be based on a careful evaluation of the property, the owner's tax situation, and their future plans for the property. A BAY cost segregation specialist can help to determine whether a cost segregation study is the right strategy for a particular property owner at a particular time.

Key benchmarks for strong Cost Segregation Studies.

1. Plan to hold the property for 3 years (depreciation recapture)

2. The cost of doing the study has a positive ROI

3. Making a Net Profit, Taxable liability to offset

Our Cost Segregation Studies start at $10,000 per property

A secondary goal of Cost Segregation is to establish the depreciable tax value for each major building component that is likely to be replaced in the future. Examples include roofs, windows, doors, bathroom fixtures, HVAC, etc. When a component is replaced, taxpayers are able to claim a “retirement loss” or “partial disposition” deduction for its remaining depreciation, assuming the value was previously established.

When you buy a property with plans to make improvements, it is best to conduct a Cost Segregation study as soon as possible. This will establish a baseline value for the components of the property, allowing you to identify and deduct the basis of anything you replace.

An example:

You buy a $1.2MM house and renovate the kitchen for $70K. During the renovation, you take out $40K worth of cabinets, flooring, and appliances. Having already completed a Cost Segregation study, you are able to take an immediate “retirement loss” deduction for $40K, and the $70K of capital expenditures can be classified appropriately.

A Cost Segregation study can be completed any time after a property's purchase, remodel, or construction. However, engaging a Cost Segregation team during development can provide significant benefits, including helping gather the necessary documentation needed to pursue all available tax deductions, and consulting on the tax implications of comparable building decisions.

Document Collection: Having our team available during construction can ensure contractor documentation is up to standard, which can often support larger deductions.

Consulting: Minor construction decisions can often have significant tax implications. LVT vs tile flooring are often both great options for your property. Tile flooring, however, has to be depreciated over the life of your building, while the full cost of your LVT flooring can be taken as a year-one deduction.

Having a team of CPAs available during construction can provide valuable insight into how decisions will impact taxes and cash flow.