There are times when changes take place within the IRS that can be of benefit to those who use them properly. An example of this is the changes in cost segregation studies, which bring them into the mainstream and allow you to take advantage of further deductions on your real estate rental property. This has been recently seen in the release of an audit technique guide by the IRS, which further explains what is expected by the IRS from a cost segregation study. It also gives further information on how a cost segregation study should be prepared.

Understanding a Cost Segregation Study

When you own rental real estate, there may be differences in the personal property and the business real property improvements that are associated with the rental. The cost segregation study is a way of evaluating those two separate types of property so that you can depreciate it properly. It should be noted, although the cost segregation study does not allow for increased depreciation deduction, it does allow you to claim those deductions sooner. In doing so, it may allow for additional cash flow that can help your business in a number of ways.

Should You Do a Cost Segregation Study?

There are certainly incentives available for performing one of these studies and if it is done properly, the tax benefits can be significant. That is due to the fact that there are accelerated depreciation methods and shorter recovery periods associated with depreciation deductions. Since you are able to move the property to faster depreciation deductions, it can result in an earlier tax benefit and a significant net present value savings.

Another factor that needs to be considered is the timing of the cost segregation study. It is important to prepare it properly and in timely fashion, depending upon the type of property that is owned. Here are a few examples.

New Construction - Out of all of the different properties for which a cost segregation study can be beneficial, you will find that new construction leads the list. It is also one of the easiest types of property for the preparation of such a study. When new construction is completed, it is possible and beneficial, in most cases, to prepare the study at any time.

Existing Buildings When Purchased - If there are existing buildings on the property when you make the purchase, it would be beneficial to prepare a cost segregation study when it is economically feasible.

Existing Buildings after a Year of Purchase - If you made the purchase of property and there were existing buildings but the purchase took place in excess of 1 year prior, it is still of benefit to prepare a cost segregation study. This may allow you to take deductions in the current year for any depreciation which was not claimed in prior years.

For more information on preparing a cost segregation study and getting the most benefit out of it, contact the professionals at Tax Force Inc.