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The IRS Position On Cost Segregation

In order to calculate depreciation for Federal income tax purposes, taxpayers must use the correct method and proper recovery period for each asset or property owned

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The IRS Position On Cost Segregation

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  1. The IRS Position On Cost Segregation www.expertcostseg.com Ta x R e d u c t i o n E x p e r t s

  2. Background “In order to calculate depreciation for Federal income tax purposes, taxpayers must use the correct method and proper recovery period for each asset or property owned. Property, whether acquired or constructed, often consists of numerous asset types with different recovery periods. Thus, property is typically separated into individual components or asset groups having the same recovery periods and placed-in-service dates to properly compute depreciation.”

  3. Here Is What The IRS Says About Cost Segregation “To calculate depreciation for Federal income tax purposes, taxpayers must use the correct method and proper recovery period for each asset…” The primary means of “determining the proper recovery period” is by conducting a cost segregation study. The purpose of a cost segregation study is to identify the value of assets with varying lives, typically 5, 7, 15, 30 and 40 for real estate.

  4. The 2017 Tax Cuts and Jobs Act The 2017 TCJA magnified the benefits by allowing ALL 5-, 7-, and 15-year life property to be depreciated in year one. This made it typical for 20 to 50% of the total cost of the real estate to be depreciated in year one.

  5. Here Is An Example Before and After 2017 Jobs Act Let’s consider a standard commercial office building with a depreciable basis of $4,000,000 purchased in September of 2019. The investor is in the 37% tax bracket. Before the Tax Cuts and Jobs Act the depreciation resulting from a cost segregation study would have looked like this: Without Cost Segregation (Straight-Line)

  6. Without Cost Segregation (Straight-Line) Use of a cost segregation study would have significantly enhanced his tax and cash flow position as follows:

  7. With Cost Segregation (Including TCJA) After the passage of the Tax Cuts and Jobs Act of 2017, and with the utilization of cost segregation, take a look at the difference: Over $1.1 million in additional depreciation in year one!!

  8. Eliminate Federal & State Income Taxes With Cost Segregation! Determine Your First Year Federal Income Tax Savings!

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