Unlocking the Power of Cost Segregation: A Tax Strategy for Real Estate Investors

As real estate investors navigate the ever-complex tax landscape, strategies like cost segregation studies stand out as a powerful tool to maximize tax savings. Whether you’re a developer, landlord, or even a high-earning interior designer, understanding how cost segregation works can revolutionize your tax strategy and free up capital for reinvestment.

What Is a Cost Segregation Study?

A cost segregation study is a strategic tax planning tool that accelerates depreciation deductions on a property by reclassifying certain components of a building into shorter recovery periods. Instead of depreciating the entire property over 27.5 years (residential) or 39 years (commercial), components such as flooring, lighting, or HVAC systems may qualify for 5-, 7-, or 15-year depreciation schedules.

This process reduces taxable income in the early years of ownership, effectively boosting cash flow. It’s important to note that cost segregation is typically performed by engineers and tax professionals who analyze the property to identify eligible assets.

How Developers Can Use Cost Segregation as a Tax Strategy

For developers, cost segregation is a game-changer. By accelerating depreciation, developers can offset taxable income generated by the sale of properties or ongoing development projects.

Example:

• Scenario: A developer builds a $5 million commercial property. A cost segregation study identifies $1 million in assets that qualify for accelerated depreciation.

• Tax Benefit: Accelerated depreciation deductions could offset the developer’s taxable income, reducing overall tax liability and freeing up funds to reinvest in new projects.

Additionally, bonus depreciation rules allow developers to write off 80% of qualifying assets in the first year through 2024, offering a significant immediate tax break.

How Landlords Benefit from Cost Segregation

Landlords, especially those with multiple properties, can significantly improve cash flow using cost segregation studies. By reclassifying certain components of their rental properties, landlords can reduce taxable income and reinvest savings into property improvements or additional acquisitions.

Example:

• Scenario: A landlord owns a residential rental property worth $1 million. A cost segregation study identifies $200,000 in assets for accelerated depreciation.

• Tax Benefit: The landlord reduces taxable income by claiming larger depreciation deductions, which is especially useful for sheltering rental income.

Furthermore, landlords using real estate professional status can offset active income with passive losses, creating additional opportunities for tax savings.

An Interior Designer Making Over $1 Million Per Year

While cost segregation is traditionally associated with property owners, high-earning interior designers or businesses in the real estate-adjacent space can also benefit—particularly if they own office space or warehouses for their operations.

Example:

• Scenario: An interior designer owns a $2 million office building used for client consultations. A cost segregation study identifies $400,000 in assets for accelerated depreciation.

• Tax Benefit: The designer can offset business income with depreciation deductions, reducing overall tax liability. This allows the designer to reinvest in their business, hire staff, or expand operations.

Even better, high earners subject to elevated tax rates gain more significant proportional benefits from the deductions a cost segregation study provides.

Who Should Consider a Cost Segregation Study?

Cost segregation is ideal for:

1. Property owners with newly acquired or constructed properties.

2. Investors with significant taxable income from real estate or other ventures.

3. Businesses that own their premises and want to optimize tax benefits.

The larger and more valuable the property, the greater the potential tax savings, making cost segregation an attractive option for developers, landlords, and high-earning professionals alike.

Why Gilmer Ferretti?

At Gilmer Ferretti, we specialize in helping real estate entrepreneurs, developers, and adjacent professionals maximize their tax benefits. A cost segregation study isn’t just a tax-saving tool—it’s a strategic investment in the future of your business. Our team of experienced advisors works closely with you to ensure every eligible deduction is leveraged, keeping more money in your pocket and your business thriving.

Take Action Today

If you’re a real estate investor or business owner, there’s no reason to leave money on the table. Contact us at Gilmer Ferretti today to discuss how a cost segregation study can enhance your tax strategy and supercharge your investments.

By tailoring your tax plan to include strategies like cost segregation, you’re not just managing your taxes—you’re optimizing your financial future.