Do you own residential or commercial real estate for investment purposes? If so, you may want to consider doing a cost segregation study to lower your taxes. It is a way for investors to more quickly deduct the depreciation of a property against their taxable income. By doing this, you can reduce your annual federal and state income tax payments, potentially freeing up additional cash for other investments or purchases.

Here are some things to think about:

Potential Benefits

  • Accelerating the depreciation you can claim on your investment properties: Instead of having to depreciate an entire property over 27.5 or 39 years, you can claim deductions for certain systems in your building – such as its electrical and plumbing fixtures – over 5, 7 or 15 years.
  • Reducing the taxes you pay on your investment properties each year: If you can claim a greater amount of depreciation in a tax year, you’ll pay less income taxes on your investment property during that year.
  • Freeing up cash: This will leave you with more cash after you pay your taxes, giving you the opportunity to purchase additional investment real estate if you want to build your property portfolio.

Potential Drawbacks

  • It isn’t free: The amount you pay for a cost segregation study will vary, depending on the size and type of your property and the amount of documentation you can provide. You can expect to pay from $5,000 to $15,000 for a study.
  • It takes time: You’ll have to be patient after ordering a cost segregation study. Depending again on the size and type of your property, you can expect a cost segregation study to take up to 2 months.

Even with the high fees charged for a cost segregation study, using this tax strategy is typically a smart financial move. The amount in taxes you save each year following the study will more than cover the one-time fee of a study.

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