For real estate investors and property owners, actively managing tax liability is essential in maximizing ROI. Strategically pairing a Cost Segregation Study provided by Criterium Engineers with current Bonus Depreciation options allows property owners to accelerate tax deductions, improving cash flow and boosting profitability.
What is a Cost Segregation Study?
Cost Segregation is a tax planning strategy that breaks down a building’s components into different asset classes with varying depreciation periods. Instead of depreciating the entire property over 27.5 (residential) or 39 (commercial) years, cost segregation identifies components such as lighting, flooring, permanent fixtures, or landscaping that can be depreciated over shorter time frames — usually 5, 7, or 15 years. By accelerating depreciation, property owners can claim more deductions in the earlier years of ownership, which reduces taxable income.
What is Bonus Depreciation?
Bonus Depreciation is a tax provision that allows businesses to deduct a large percentage of an asset’s cost in the year it is first used in service, rather than spreading the deduction over its entire useful life. Under the Tax Cuts and Jobs Act (TCJA) of 2017, 100% Bonus Depreciation was introduced for qualifying assets placed in service between 2017 and 2022. This means that assets with useful lives of 20 years or less could be fully depreciated in the first year. The bonus depreciation rate began phasing down in 2023, with the rate decreasing 20% each year until it fully phases out by 2027 (unless extended by new Federal legislation).
How Do They Work Together?
When Criterium Engineers performs a Cost Segregation Study, we identify components of a property that qualify for shorter depreciation lives. These items are then eligible for Bonus Depreciation. For example: in 2024, investors can take advantage of 60% Bonus Depreciation. If $500,000 of a building’s components are eligible, the owner can deduct $300,000 immediately in the year the property is placed into service. This results in substantial upfront tax savings.
Why Does It Matter?
- Improved Cash Flow: Larger depreciation deductions reduce taxable income, and more cash is made available for reinvestment or other purposes.
- Maximizing Deductions: Taking advantage of Bonus Depreciation (when available) can lead to significant tax savings, especially for new property owners.
- Flexibility: Cost Segregation studies can be performed on properties acquired or renovated in past years, allowing owners to recover previously unclaimed deductions.
For the year 2024, investors can take advantage of 60% Bonus Depreciation, with the rate decreasing each year until 2027. Because it is uncertain Bonus Depreciation will be renewed in the future, now is the time to contact us to conduct a Cost Segregation Study for your real estate investments. The opportunity to maximize these benefits is time-sensitive, so acting quickly can yield the most significant tax savings.