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Section 1031 Exchanges & Cost Segregation

Great Tax Saving Tools with Similar Goals

Real estate investors have known for years that 1031 property exchanges can save taxes. A cost segregation study is something else investors should consider at the same time—as both may save taxes and improve cash flow. Here’s how a cost segregation study may benefit your next transaction.

Whereas cost segregation studies are often conducted at the time of purchase; 1031 property exchanges are arranged at the time of sale of the investment property. The goal of the 1031 tax savings device is to postpone the recognition of capital gains on the relinquished property by shifting the tax consequences to the books of the new property purchased and thus deferring the tax payment into the future.

The goal of a cost segregation study is to accelerate depreciation expenses into earlier years of a real estate investment’s lifetime. This action allows these accelerated deductions to increase allowable expenses in the early years of the investment deferring tax payments into the future. This will produce increased cash flow while benefiting from the time value of money to an estimate 5% to 10% of the building’s cost basis.

This proven tax strategy is accomplished by segregating personal property (Section 1245 assets) out of long-term depreciation categories such as commercial buildings (39 years or apartments – 27½ years) and reclassifying these assets to shorter depreciation categories including 5, 7, and 15 year. The additional side benefit is the values of each of the study’s components, including Section 1250 assets such roof, HVAC, and building façade components can later be used to claim an early retirement loss or partial disposition for any remaining depreciation basis left when the asset is replaced.

Talk to your tax specialist about a 1031 property exchange and partner with Criterium Engineers’ experienced team of cost segregation engineers. Together, we can work to maximize your real estate transaction.