Ah yes, the wonderful life of a real estate investor. In between the passive income generated and tenants calling you at midnight complaining about broken heaters, there is one savvy tax savings strategy that is often misunderstood—or just plain unheard of.
But the end result of this strategy can yield upfront cash flow faster for investors and help reduce your current tax liability at the same time. Do I have your attention yet?
If you’re ready to hold onto more of your hard-earned cash, say hello to cost segregation.
What is Cost Segregation?
Cost segregation is a tax planning strategy used by real estate investors that accelerates the depreciation of certain components of their properties. This amounts to a reduction in your current tax liability, resulting in upfront cash flow.
How exactly does it work? According to the IRS, a building normally depreciates its value over 39 years (non-residential) or 27.5 years (residential).
So, let’s say you own a residential rental property. Without cost segregation, your property would be depreciated consistently (known as “straight line”) over 27.5 years.
Sure, that’s great and all, but everyone knows that most components, like carpeting, landscaping, appliances, and cabinetry, don’t last 27.5 years—particularly in rentals.
With cost segregation, you can reclassify a portion of your assets as personal property instead of real estate property in order to depreciate them on a much, much faster schedule (such as five, seven, or 15 years) for tax purposes. This lessens your tax burden, thereby leaving you with more profit.
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