On today’s show we’re talking about cost segregation, accelerated depreciation and ultimately paying taxes.
First of all, I’m not an accountant, and this show is not intended to be tax advice in any way. Always seek your own tax advice.
Most investors know that you can record a depreciation expense to recognize the wear and tear on your property. While this is not an actual cash outlay, it can be used to deduct against income and reduce the amount of tax owing.
But as a general rule, the depreciation on your building will be calculated over 27.5 years. Land doesn’t depreciate, so you can only depreciate the improvements.
But not all things wear out at the same rate. It’s often a good idea to look at depreciating your property in its constituent parts.
For example, you kitchen appliances have a different lifespan compared with the paved driveway. The electronic security system has a different life from the security fence. The key to accelerating the depreciation for those items having a shorter life is something called cost segregation. This is an accounting and an engineering exercise that allows you to break your property apart into its individual pieces and depreciate each of these pieces on their own schedule.
If it sounds like a lot of work, well, you would be correct.
Host: Victor Menasce