Cost Segregation Study

I want to talk to you about how cost segregation studies can help you in your business. But, before we get into this, I want to backtrack a bit. Let’s talk about depreciation. 

Simply put, depreciation is the “useful life” of something. Just about everything can be depreciated: computers, furniture, cars, rental properties, and so on. 

There is something called a depreciation schedule. It’s pretty self-explanatory and just means there’s a period of time in which a property is depreciated. 

Now let’s look at something else; what’s something that loses value as soon as you buy it? 

That’s right, cars! 

Cars certainly have a depreciation schedule but there’s a way to use that depreciation to your advantage. The “normal” depreciation schedule for cars is five years, and cars have a straight line depreciation. Straight line just means it’s a normal depreciation time. 

If your vehicle is $100,000 and it has a straight line (normal) depreciation, you’re going to get a $20,000 deduction a year on that vehicle. 

Easy, fun math! $100,000/5(years) = $20,000 deduction a year. 

Another positive to think about, is if you sell your vehicle after five years there’s no depreciation recapture. This means you don’t have to pay the IRS taxes back after you sell your car. 

Consider this: You used Section 179 to buy your car (to learn more about Section 179 check out our article where we deep dive into how you utilize this deduction) and you depreciate 100% of the vehicle in year one. You then decide to sell it in year two. You’ll have to pay back 80% of that depreciation deduction.

Needless to say, holding onto that car for five years would be very beneficial to you.  

Now, let’s get into the meat of this article: Cost Segregation Studies. 

If you own a rental property, the straight line depreciation is 27.5 years for residential and 39 years for non-residential properties. 

However, if you utilize a cost segregation study, you would hire a firm to break the property down into components. They have different “buckets” they can put properties into. Five year bucket, seven year bucket, fifteen year bucket… 

So, why does this matter?

I’m going to answer that question with some more math and two different scenarios. 

In scenario one, you have a $100,000 property with a straight line depreciation over 27.5 years. 

In scenario two, you use a cost segregation study which accelerates the depreciation. When it’s all said and done, the firm found in your cost segregation study your property depreciation averages ten years. 

In the first scenario, with the straight line depreciation of 27.5 years, you can divide 1/27.5. This comes out to about 3%, meaning you have a $3,000 depreciation deduction. Not bad, right? If you’re in a 50% tax bracket you’re going to save $1,500 in taxes. 

In the second scenario where we used the cost segregation study, if you get a $10,000 deduction and use the same math (dividing by $100,000 and sitting in the 50% tax bracket), you’re at about $5000 in savings.

That’s better, don’t you think? 

Using cost segregation strategy and depreciation can be very valuable. So, keep that in mind next time you’re looking to save.