Owning a multi-family property can deliver significant tax benefits, but many investors overlook one powerful strategy called cost segregation. This tax strategy allows property owners to accelerate depreciation on specific building components. This can lead to big savings in the first few years of owning the property.
Before implementing this strategy, it is important to understand how cost segregation works, its main benefits, and any possible disadvantages. In this article, we’ll break down cost segregation and explain how multi-family property owners can use this powerful tax-saving tool.
What is Cost Segregation?
Cost segregation is a tax strategy used by real estate investors to accelerate depreciation on specific elements of a property. Higher depreciation can lead to larger tax deductions and substantial savings.
How it works: rather than depreciating an entire building over the typical 27.5 years for residential rental properties (or 39 years for commercial properties), cost segregation identifies certain assets within the property—such as lighting, flooring, HVAC systems, and landscaping—that can be depreciated over shorter timeframes (usually 5, 7, or 15 years).
Key Benefits of Cost Segregation for Multi-Family Properties
Property owners can get more significant tax deductions earlier in the property’s lifecycle by changing how they group their property parts. This can help them improve cash flow and lower their taxable income. This can benefit multi-family property owners, who often need immediate money for improvements or repairs.
Possessing more cash on hand allows investors to find more chances to reinvest and make changes. This, in turn, can cause higher property values, higher rental rates, and optimized profitability over the life of the property.
How to Get Started with Cost Segregation
Conducting a cost segregation study is the first step in implementing a cost segregation tax strategy. This study is a detailed analysis typically completed by tax and engineering professionals to find and reclassify the systems and components of a property that would qualify for accelerated depreciation.
Through this practice, it is critical to work closely with a tax professional to ensure that everything is properly documented and that filing is done right. Work with a tax professional offering financial planning advice for multi-family property owners, or find a financial planner who can work closely with your CPA. This way, you can make sure you are expertly guided through the process.
When Should Property Owners Consider a Cost Segregation Study?
There are certain periods when a cost segregation study can be beneficial. This strategy is not for every property owner but could lead to significant tax savings in some circumstances. For example:
- After Purchasing a Property: If you recently acquired a multi-family property, conducting a study early helps you to take full advantage of accelerated depreciation.
- Following Major Renovations or New Construction: If you’ve made significant improvements to a property, a study can help reclassify those upgrades for faster depreciation and increased tax savings.
- Before Filing Taxes: If you’re looking to reduce taxable income for the year, a study can identify opportunities to maximize deductions.
- For Properties Owned Within the Last Few Years: If you’ve owned a property for a couple of years but haven’t utilized cost segregation, you may still be able to “catch up” on missed depreciation deductions by filing a tax adjustment.
Unlocking Tax Savings with Smart Strategies
Cost segregation has many financial benefits for multi-family property owners, but vigilant planning and preparation are important before implementing this strategy. So, it is essential to work with experienced professionals to make sure everything is accurate, IRS compliance, and the best financial outcomes for your situation.
Get in touch with your nearby Real Property Management office for expert advice on boosting your multi-family property’s profits with smart tax planning. Reach out to Real Property Management Horizons for high-quality property management services in Bradenton and adjoining periods for expert assistance. Call us at 941-313-3373 or connect with us online today!
We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.
