1705: Cost Segregation
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Jennifer (00:00:01) - Welcome to episode five of season 17 of The Growing Empire show. Today we're going to talk about cost segregation studies and the benefits that they provide for investors that utilize them. So make sure you stay tuned.
Speaker (00:00:16) - Welcome to Growing Empires, hosted by real estate entrepreneur and trusted investment advisor Jennifer DeJesus. Growing empires provides insight to building wealth through passive income, producing real estate investments for those who want to build and manage a more profitable real estate portfolio.
Jennifer (00:00:36) - So keeping with our theme of emerging trends and opportunities for 2024, I thought it would make sense for us to talk about cost segregation studies, because we're starting to hear a little bit more about these studies, and more people are starting to utilize them in their tax deferment strategies. So today we're going to delve into the world of real estate investing and uncover the strategies that help you maximize those returns. This is a often overlooked but highly advantageous tax deferment strategy, and it's called cost segregation studies. So what exactly is a cost segregation study? Well, essentially it's a detailed analysis which is conducted by a qualified professional to identify and reclassify certain components of a commercial property for tax purposes.
Jennifer (00:01:25) - These components, such as building elements and improvements, are categorized into shorter depreciation periods, allowing investors to accelerate depreciation deductions and consequently reduce their tax liabilities. Now, you might be wondering why real estate investors bother with these cost segregation studies. So let me break it down for you. First, increase cash flow by accelerating depreciation deductions through a cost segregation study, investors can significantly boost their cash flow in their earlier years of ownership. This extra cash can be reinvested into the property or used for other investment opportunities. Secondly, improve return on investment with more cash on hand. Due to the reduced tax liabilities, investors can achieve higher overall returns on their real estate investments. This can make a significant difference in the long term profitability of a property. Third, we have enhanced property value. The ability to defer taxes through a cost segregation study can increase the after tax value of a property. This can be especially advantageous when it comes to refinancing or selling a property, as the higher value can result in greater proceeds for the investor.
Jennifer (00:02:38) - Then there's a competitive advantage in today's competitive real estate market, any advantage can make a difference. By utilizing cost segregation studies, investors can position themselves more favorably by maximizing tax benefits and increasing the bottom line. Cost segregation studies also offer compliance and risk mitigation. Cost segregation studies are conducted by qualified professionals, and they ensure compliance with IRS regulations, which help mitigate the risk of audits. By following proper procedures and documentation, investors can have peace of mind knowing they're taking full advantage of the available tax incentives without making the tax authorities suspicious. Now, we should probably address some common misconceptions about cost segregation studies. And one is that it's only beneficial for large commercial properties. And while it's true that larger properties, typically your greater tax benefits cost segregation can still be advantageous for smaller commercial properties and even certain residential properties. Another misconception is that cost segregation studies are prohibitively expensive. While there are costs associated with hiring a qualified professional to conduct the study, the potential tax savings often far outweighs the expenses. Plus, many times firms offer flexible payment options such as contingency fees based on tax savings.
Jennifer (00:04:02) - Some investors believe that cost segregation is complex and risky. While it's true that cost segregation studies require careful analysis and expertise, working with a reputable firm can minimize those risks and ensure compliance with IRS guidelines. Additionally, the potential benefits of a cost segregation study far outweigh the risks for savvy real estate investors. Essentially, these studies offer real estate investors a powerful tool for maximizing tax benefits, increasing cash flow, and enhancing overall returns on investment. When you understand the advantages of cost segregation and you work with the qualified professionals, many investors see significant value and gain a competitive edge in the marketplace. So let's explore the steps involved in a cost segregation study. So the first step is the property inspection documentation. This is where you have a qualified professional, often an engineer or a CPA specializing in cost segregation. We'll visit the property to assess its components and gather relevant documentation such as blueprints, construction records, improvements to the properties, and purchase agreements. So you might be wondering when investors should consider conducting a cost segregation study.
Jennifer (00:05:18) - And there are several scenarios where it can be particularly advantageous. First is when you acquire the property. Conducting a cost segregation study shortly after purchasing a property allows investors to maximize tax benefits from the start of ownership. By accelerating depreciation deductions early on, investors can increase cash flow and improve the overall returns on investment. Secondly would be when you renovate or improve a property. Any significant renovations or improvements to a property provide an opportunity to reclassify certain components for tax purposes. By conducting a cost segregation study. After the renovations, investors can capture additional tax benefits and enhance the property's value. And the third option is really when refinancing or selling a property. So prior to refinancing or selling a property, investors can benefit from conducting a cost segregation study to accurately assess its value and potential tax savings. By understanding the tax implications of a transaction, investors can make informed decisions to maximize returns.
Speaker (00:06:21) - The episode will continue in just a moment.
Jennifer (00:06:25) - As an investor, we know it's important to stay on top of market trends and real estate opportunities that add value to your portfolio.
Jennifer (00:06:31) - We also know that having a trusted source of reliable information to help you stay a step ahead of other investors is critical to your success. If you're interested in having these types of resources as well as access to me and my team, I invite you to join the Empire Investment Club, a free service that gives you an easier way to make sense of today's and tomorrow's real estate opportunities. As a member of the Empire Investment Club, you'll get access to relevant resources and investment focused experiences such as live interactive webinars, market trend presentations, and investor socials designed to equip you with what you need to succeed. So whether you're an active investor, passive investor, a combination of both, or just starting out, the club is where you'll get what you need to build a portfolio you love. To join, just head over to Jennifer DeJesus. Com sign up and we'll see you in the club where everyone's on a journey to becoming a better investor. So let's move on to the second step in a cost segregation study. Asset classification.
Jennifer (00:07:31) - During this phase, the qualified professional analyzes the property's components and categorizes them into shorter depreciation periods based on IRS guidelines. This may include separating out items such as personal property, land improvements, and building components. Once the asset classification is complete, the next step is to calculate depreciation schedules for each identified component. This involves determining the appropriate depreciation method and useful life for each asset category in accordance with IRS regulations. Following the calculation of depreciation schedules, the Cost Segregation study concludes with the preparation of detailed report outlining the findings and tax implications. This report will then serve as documentation for the IRS and help support the reclassification of assets for tax purposes. Now let's circle back for a minute to when investors should consider a cost segregation study. In addition to the scenarios that I mentioned earlier, it's important for investors to evaluate the potential tax benefits and costs associated with the cost segregation study. Factors such as property size, age and acquisition costs, as well as the investors tax situation and investment objectives should all be taken into consideration for larger properties, specifically commercial properties with significant construction costs.
Jennifer (00:08:51) - The potential tax savings from a cost segregation study are often substantial, making it a compelling strategy for maximizing returns. However, as we mentioned before, even smaller properties can benefit from the cost segregation, particularly if they've undergone recent renovations and improvements. Ultimately, the decision to pursue a cost segregation study should be based on a thorough analysis of the property and its tax implications, weighing the potential benefits against the costs involved. Most importantly, though, you want to make sure that you're utilizing the strengths of your advisors, specifically your CPA and potentially even your attorney, to make sure that before you go down this road and spend the money for a cost segregation study, that is going to be advantageous for you and your investment strategy. Now, I wanted to mention that the Empire Investment Club is going to be hosting a cost segregation workshop and networking event. And the great news is, by the time that you hear this podcast, the networking event will be about a week away. So on Thursday, May 30th of 2024, we are hosting a networking event for investors at our corporate office in Allentown, Pennsylvania.
Jennifer (00:10:10) - The doors open at 530 and the events from 6 to 8 p.m.. We will have experts in the cost segregation world speak at this event, and then you'll be able to mix and mingle with other investors like yourself. I hope you will take advantage of this opportunity to learn more about cost segregation studies, and how they can help you maximize your returns and decrease your taxable income. Make sure you join us on Thursday, May 30th for this incredible event. And until next time, take care!
Speaker (00:10:46) - For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio, visit Growing empires.com.