Cost Segregation Software

[Elnora Heidrick]

CostSegregation is a commonly used strategic tax planning tool that allows companies and individuals who have constructed, purchased, expanded or remodeled any kind of real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes.

When a property is purchased, not only does it include a building structure, but it also includes all of its interior and exterior components. On average, 20% to 40% of those components fall into tax categories that can be written off much quicker than the building structure. A Cost Segregation study dissects the construction cost or purchase price of the property that would otherwise be depreciated over 27 or 39 years. The primary goal of a Cost Segregation study is to identify all property-related costs that can be depreciated over 5, 7 and 15 years. For example, certain electrical outlets that are dedicated to equipment such as appliances or computers should be depreciated over 5 years.

KBKG goes beyond a traditional Cost Segregation study and will also separate all of the different building structural components (such as the roof, windows or HVAC units) so when they are replaced, a loss deduction can be claimed on them. For leased property, we also separate tenant leasehold improvements.

What is Involved in a Cost Segregation Study?

A quality Cost Segregation study evaluates all information, including available records, inspections, and interviews, and presents the findings in a clear, well-documented format. Our process for conducting a detailed Cost Segregation includes a review of any available cost detail for the property, a review of any available blue prints and a physical inspection of the property. If none of this information is available, a Cost Segregation study can still be performed by estimating component values on site.

When should a Cost Segregation study be conducted?

A Cost Segregation study can be completed any time after the purchase, remodel or construction of a property. However, the optimum time for a study for new owners is during the year a building is constructed, purchased or remodeled. For investors who are in the planning phases of construction or remodeling, the best time to consider a Cost Segregation study is before the infrastructure of the building is set. KBKG offers a free preliminary analysis that can help determine the right timing and strategy for any investor.

What should I consider when selecting a Cost Segregation provider?

You should always read the bio and resume of the persons signing your Cost Segregation study. Make sure they are certified with...READ MORE

Will the company be available if I get audited by the IRS?

Any company can give you a Cost Segregation report with results that save you a lot of money; the real question is whether it will stand up to IRS scrutiny. The true value of the fee you pay is how easy (or painful) the audit process goes. Every Cost Segregation company will say...READ MORE

Does the company have tax experts that can help if my CPA has questions?

There are so many unique fact patterns and situations that can have a tax impact on how the Cost Segregation deductions will flow through on your tax return. A Cost Segregation engineer does not know enough about tax to truly understand how the Cost Segregation deductions will specifically impact you. Using a firm with tax experts on staff will...READ MORE

Cost Seg Savings Calculator

Residential Cost Segregator

History of Cost Segregation

IRS Cost Segregation Audit Techniques Guide

Cost Segregation Case Study

Cost Segregation FAQs

KBKG is a tax consulting firm that works with large companies and certified public accountants (CPAs) to deliver specialized tax services. We provide assistance with R&D tax credits, cost segregation, repair v capitalization review, section 45L credits, section 179D, transfer pricing, and IC-DISC. We also offer subscription based calculators including residential cost segregation software for rental properties, partial disposition, and 481(a) calculations.

Simply, cost segregation is a tax deferral strategy that identifies assets within a building that can be depreciated over a shorter period than the 39-year standard method. It can identify substantial tax-saving opportunities for taxpayers who have constructed, purchased, or renovated a facility. The process combines engineering, construction, and tax expertise to maximize tax deductions for prior and current real estate investments.

Buying real estate is expensive, and so is renovating a home, store, restaurant or warehouse. Fortunately, real estate investors can turn to a federal tax planning tool that can help them boost their cash flows when purchasing, building or renovating residential or commercial real estate.

The depreciation of any investment real estate you own can be written off on your income taxes over a period of time and varies depending on the type of investment property. Cost segregation though, allows you to speed up this depreciation schedule, increasing the amount you can deduct each year.

Cost segregation is completely based on the depreciation of your investment real estate. Depreciation is a deduction that real estate investors can claim on their income taxes each year to help them recover the cost of owning, operating and maintaining that property.

Why? If you bought these items separately, you would be allowed under the IRS tax code to depreciate them over 5 to 15 years. But if these items were instead already part of a building that you purchased, you are only allowed to depreciate them over 27.5 years if you purchased a residential building or 39 years if you bought a commercial property.

In a cost segregation study, your team of engineering and financial experts will separate each part of your investment property and place them in their own categories. You can then benefit from accelerated depreciation deductions for some of these building features.

Next, your team members will identify any operating costs of your investment property that you can depreciate over either 5, 7 or 15 years. Your team members will do this by studying any documents that you can provide them, such as blueprints, property records and inspection reports.

A cost segregation study makes sense if you have purchased or built investment real estate during the past 15 years. You can take advantage of cost segregation strategies whether your investment properties are residential or commercial, so owning a single-family rental would not disqualify you from the benefits of a study.

Maybe you already own a single-family home that you rent out. You might want to purchase an office building to add to your real estate portfolio. By cost-segregating the depreciation of your single-family property, you'll reduce the taxes you pay on that property in the following years, freeing up additional funds that you can use to help purchase that office property.

You can order a cost segregation study any time after you buy, build or remodel a property. But the best time is before you file your tax return during the same year that you buy, build or remodel your investment real estate. This will give you the most tax savings when you are also potentially spending the most dollars on your real estate.

But what if you didn't perform a cost segregation study when you first built, purchased or remodeled a property? You can still take advantage of this tax strategy by ordering what is known as a look-back study.

This type of cost segregation study allows you to claim a catch-up tax deduction. Once the cost segregation study is complete, you can claim this catch-up deduction in a single year. The amount of the deduction will be equal to the difference between what you originally claimed as depreciation on your investment property and what you could have claimed had you performed your cost segregation study earlier.

The exact number of days it will take your team to complete such a study depends on the type of property you own, the size of your investment property and whether you are able to provide the paperwork that your analysts need. In general, though, you can expect a cost segregation study to take 30 to 60 days.

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.

No, cost segregation isn't available for your primary residence. You can use cost segregation on residential real estate, but only on residential properties that you own as investments, not those that you live in as a full-time residence.

Cost segregation is a tax planning tool that gives real estate investors the chance to accelerate the depreciation of their investment properties. By doing this, they reduce their annual federal and state income tax payments, potentially freeing up their money for other investments or purchases.

Rocket Mortgage has won more awards than any other brand in the J.D. Power U.S. Mortgage Servicer Satisfaction Studies; this customer satisfaction study has been conducted annually from 2002-2023. Visit JDPower.com/Awards for more details.

Rocket Mortgage, LLC, Rocket Homes Real Estate LLC, and RockLoans Marketplace LLC (doing business as Rocket Loans) are separate operating subsidiaries of Rocket Companies, Inc. (NYSE: RKT). Each company is a separate legal entity operated and managed through its own management and governance structure as required by its state of incorporation and applicable legal and regulatory requirements.

Cost Segregation is a highly beneficial and widely accepted tax strategy utilized by owners of commercial and residential rental property to accelerate depreciation deductions, defer taxes, and improve cash flow. A quality study provides the appropriate documentation needed to support the correct classification of depreciable assets related to a building and exterior improvements. It is important to note that a Cost Segregation study does not create new deductions, it simply increases deductions in the early years of ownership. This front-loading of depreciation allows the taxpayer to take advantage of the time value of money.

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