As your commercial property business expands and grows, tax planning becomes more complicated and your tax burden increases. Anything you can do within the limits of the law to restructure, reorganize and minimize your tax burden is a boost to your bottom line.
If handled properly, cost segregation could dramatically improve your tax situation. By segregating your traditional commercial property depreciation from asset-based depreciation, you can accelerate depreciation and minimize your tax burden.
More simply put, cost segregation on your commercial property could result in lower annual taxes.
To do this, you will need a segregation study done. This study can be expensive, but it could save you far more than you would spend.
Segregation studies distinguish real property from other properties
If you do not do a segregation study, everything on a commercial property you own will be taxed according to the 39-year depreciation schedule applied to real property. A property assessed at $1,000,000, for example, will depreciate at about $25,641.03 every year.
However, if you could get half of that property declared personal property or land improvement, you could lower your tax burdens on the real property (which is now at $500,000 instead of a million) and the non-real property would be taxed at a much higher depreciation rate (as much as a seven-year lifespan, depending on the property type).
So, for the $1 million real property, your real-property tax burden might be only based on $500,000 of real property value, and you might accelerate the depreciation of the rest of the property.
(*These numbers are approximate and hypothetical.)
The role of the segregation study
The primary point of a segregation study is to identify any aspects of your real property that could be separated from that real property. The properties that can be separated from the real property values can include furnishings like chairs and desks, fixtures like doors and lights, and in some cases even flooring.
Since these items depreciate at a faster rate, you can reduce your tax burden by having these items valuated separately from the 39-year depreciation schedule of real property.
As you can imagine, a segregation study can be extremely expensive, especially for larger commercial properties. A trained and certified expert cataloging every door, light fixture and flooring tile in every room in a building: This is going to be expensive.
Is a segregation study right for you?
Normally, the cost is only justifiable for larger commercial buildings or projects because the cost is simply too high for smaller structures to benefit adequately from the procedure. The best times to consider a segregation study are:
- Upon the initial purchase of the property
- After significant maintenance
- After significant improvements or upgrades regarding fixtures and furnishings
You need to have your segregation study results quickly if you intend to use them on your tax filing. However, you should not rush into a segregation study without first talking to an experienced commercial tax planning lawyer who can assess the gains and risks involved for you.