During my conversation with tax expert Jeff Hobbs, he explained to you a little known and misunderstood method that virtually guarantees putting money in your pockets. The method is called cost separationand Jeff explains what this really is and why every investor should consider the benefits.
What is cost segregation?
Cost segregation involves identifying building components and reclassifying the tax life of each of these components. A building is literally broken down into all its components - all wood, poles, screws, nuts, bolts, cubic meters of concrete, square meters of carpets, gallons of paint, and so on.
Most commercial properties set a 39-year amortization schedule and most residential properties have an amortization schedule of 26.5 years. However, the IRS assigns a tax life to each of the individual components. Most components eligible for accelerated treatment can be reclassified as 5, 7 or 15 years:
5 year tax life: property, plant and equipment, moveable assets (carpeting, secondary lighting, process-related systems, cabinets, ceiling fans, etc.)
7 year tax life: all telecommunication related systems (cabling, telephone, etc.)
15-year tax life: Land improvements (parking lots, sidewalks, curbs, landscaping, site features such as a flagpole or pond, etc.)
Why would an investor use cost segregation?
Jeff says that the best reason to apply cost segregation is because it puts money in your pockets. For example, a typical $ 1 million asset will save the owner between $ 50,000 and $ 150,000 in federal taxes. If the study resulted in tax savings of $ 80,000 and the investor owed $ 80,000 from IRS to the IRS, he would only pay 100% of the tax debt!
When Jeff engages with a client, he provides a guarantee! For properties under $ 500,000, it guarantees a return on investment of 300% (return based on the cost of services). For properties over $ 500,000, it guarantees a return on investment of 500%. The average return on investment of his client is 1200%. With the typical $ 1 million building, the $ 80,000 tax benefit from the above example would cost between $ 4,000 and $ 7,000, depending on the size of the asset, its complexity, location and the documents made available to the client.
Is cost separation always beneficial?
There are only two occasions where a cost segregation study is not beneficial. (1) If you are a non-profit organization or (2) you are not profitable. In basic occasions, you do not pay taxes, so a tax saving will do nothing for you.
Everyone wants to save as much as possible on their income tax. Therefore, it is at least profitable to look at what the benefits can bring you. A quick Google search of "cost separation service in (city)" is the best place to start!