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cost segregation new construction single family home

If you plan on starting a new residential construction project, you may want to consider adding a cost segregation study to your overall plan. Better yet, utilize a full-service real estate investment company that conveniently builds a cost segregation analysis into their new construction projects. It’s an extremely important element that allows for a tremendous tax-saving opportunity that is often overlooked – the chance to greatly accelerate depreciation deductions on land improvements and personal property early on in the game. Whether you perform a cost segregation study on a single-family home, duplex, or another type of rental property, you will literally save yourself thousands of dollars in the process.

What is a New Construction Cost Segregation Study

A new construction cost segregation study is a thorough analysis of the non-structural components that make up a property for the sole purpose of reclassifying these eligible items into different tax classifications. Simply put, this pulls the eligible assets out of a “real property – section 1250” tax classification, which depreciates over the entire lifetime of the property, and instead, places them into “personal property/land improvements – section 1245” with new accelerated depreciation time frames.

“Doing a cost segregation is one of the most powerful tools an investor has at his/her disposal. The tax savings is phenomenal. Yet another reason that real estate is one of the best ways to build wealth.” ― Clayton Morris

Reclassification of Property Assets Allows for faster Depreciation Rates

These newly assigned items are depreciated over a shorter tax life – 5, 7, 15 years, as opposed to everything lumped into one real property depreciation time frame of the entire life of the property – 27 1/2 years. This, therefore, significantly accelerates depreciation on these eligible items, which, in turn, greatly decreases your tax burden and increases your cash flow in the earlier life of the investment.

As you can see, performing a cost segregation study on new residential construction projects is certainly a smart real estate tax strategy that prevents your money from being tied-up into one property. This allows for the flexibility to allocate your funds into other real estate investments so you can quickly grow your portfolio. If your portfolio is growing, and you find that you need reliable rental property insurance that will maximize your cash flow, take a look at National Real Estate Insurance Group, we utilize them for all our rental properties.

How are Items Broken Out into Accelerated Depreciation Time Frames?

A cost segregation engineer will do a thorough analysis to determine which real estate property items are eligible for accelerated depreciation. This comes down to assigning components into three classifications. Let’s take a look at each classification to better understand where new construction property elements may fall into place:

  • Building Components/Personal: This includes certain items that are brought into, installed, or applied to the residential property that are separate from the building’s structure. Kitchen cabinets are one example of a building component.

  • Site Work/Land Improvements: Site work includes improvements to the area where the structure will stand. However, it would be before the foundation is applied, and before going vertical. This might include soil removal or grading. Site work/land improvements also include work done to the area surrounding the immediate construction site. Laying down a driveway is a perfect example of land improvements.

  • Building Structure: This would be the building and its structural components. Items such as the foundation, as well as plumbing, are placed in the building structure category.

Let’s break it down a bit further with additional examples of items that coincide with each cost segregation category, along with their depreciation time frames:

  • (5- Year) Building Components: Moldings, Flooring/Carpet, Ceiling Fans, Wall Coverings, Window Treatments, Specialty Plumbing for Kitchen Sinks and Washer Hook-Ups, Security, Appliances

  • (15-Year) Site Work/Land Improvements: Driveway, Landscaping and Irrigation, Exterior Fencing, Patio/Porch Concrete

  • (27 1/2) Building Structure: Foundation, Roofing Systems, HVAC, Electrical, Plumbing, Fire Protection and Alarms, Exterior Facade/Building Skins, Doors & Frames, Windows

The Benefits of Performing a New Construction Cost Segregation Analysis

At this point, you may be realizing that you can’t afford not to perform a cost segregation analysis. This especially applies to single-family homes and duplexes that are used as rental properties. A professional cost segregation analysis on these types of residential properties can significantly reduce the amount paid to the IRS in the first year, and the years that follow, saving you thousands of dollars. To learn more about lowering your taxes even more, you may want to read Tax-Free Wealth, an outstanding book by Tom Wheelwright.

Take a look at these benefits of performing a cost segregation study on the construction of a new residential rental property:

  • Cost segregation studies performed on the new construction of single-family homes and duplexes can increase your tax savings by adjusting the time frames of deductions. This can save you incredible amounts of money, as well as free up capital to invest as you see fit.

  • You may lose all the depreciation eventually, but, cost segregation will allow you to accelerate the return on your investment in a much shorter period of time.

  • You will still continue to depreciate items over the lifetime of the property – 27 1/2 years. However, because a certain percentage of that is reclassified, and you’re accelerating it in the first year, that means you’re giving the IRS less of your money on an annual basis.

  • Reclassification of property assets within a new construction project allows you to benefit financially from new land improvements that typically can’t be written off on existing rental property purchases or renovations.

  • This tax strategy creates an audit trail that supplies you with the necessary documents for costs and classifications, in the event they are ever needed.

Watch this video to get a general overview of how a new construction cost segregation study works:


Can I Perform a Single or multi-family Home Cost Segregation Study Myself?

The money you save from having a cost segregation performed on your new rental property construction will far outweigh the fees associated with hiring a cost segregation study expert. Plus, you also have the option of having the analysis cost built-in to the new construction price, normally at a reduced rate. Having an expert in the field perform the cost segregation study will ensure that it’s well-documented and correct, as well as done in such a way that will maximize your tax savings.

Here are a few reasons why having an engineer do a cost segregation study on your new single-family home or duplex rental property construction is the best way to go:

  1. Allows for a professional and accurate assessment of classification and cost estimating of new construction projects, which will maximize your tax savings.

  2. Experienced cost segregation specialists will have the ability to read blueprints, analyze architectural drawings, bid documents, and other crucial documents that play a part in the analysis.

  3. Cost segregation studies are performed by a construction engineer with extensive knowledge of the tax law.

  4. Provides asset classification organization, along with explanations, if needed – No research or guessing on your part.

If you were thinking about doing your own cost segregation study, then it’s possible that you might also be contemplating managing your own rental property. If this is the case, you might want to look into this free online property management software.

Sample Cost Segregation Tax Savings on the New Construction of a Single-Family Home Rental Property

If you had $100,000 in cash that’s not invested, and you happen to pay a 37% tax rate on it, you would have to pay $37,000 in taxes to the government. But, if you invested this $100,000 as a down payment on the new construction of a single-family home rental property, and performed a cost segregation study, the amount you would owe to the IRS would be considerably reduced based on the following example:

Purchase Price: $400,000
Down Payment: $100,000
Cost Segregation Write-Off: $70,000

Multiple the $70,000 cost segregation write-off by the same 37% tax bracket, and you have a $25,900 savings. This means you would only owe $11,100 to the government that first year.

Take that savings of $25,900 and add it to a $6,000 cash flow for the year, you now have a $31,900 return on investment. This equates to a 31.9% first-year return on your $100,000 investment!

As you can see, utilizing a cost segregation study will greatly impact your bottom line. To further decrease your taxes, it’s recommended that you incorporate your real estate business. It will allow you to be eligible for even greater tax deductions.

Morris Invest Offers New Construction Properties with Built-In Cost Segregation Analysis

Now that you see the power of cost segregation when it comes to greatly accelerating certain aspects of a new construction property, you may want to consider integrating an analysis into your next real estate project. With this in mind, the most effective route to take would be to have your cost segregation study built right into your construction project.

“Most people don’t realize how much time and money it takes to perform a cost segregation study. Our clients are usually shocked to learn that we’ve already paid for, and already completed, the cost segregation study when they buy one of our properties.” ― Clayton Morris

Morris Invests offers a professional full-service experience where everything from the rental property construction to the cost segregation analysis is taken care of for you. Take a look at what our team can offer you:

  • Our professional team of residential real estate, construction, and engineering experts build the cost segregation studies directly into our new construction projects. This creates a hassle-free investment that is completely handled by Morris Invest.

  • A cost segregation study on a single-family home or duplex can take up to three months, or longer. But, because it goes hand-in-hand with our real estate projects, when a new construction property is purchased with us, the study is already performed. This allows the buyer to accelerate their depreciation at a much faster rate, maximizing their tax savings.

  • Our focus is on single-family residential rental properties and duplexes – making us experienced industry leaders.

Book a call with Morris Invest. Let our team of seasoned professionals help take care of all the cost segregation details so you won’t have to. Also, take a look at our post on real estate investing tools to get ahead of the game, as well this article we wrote on using your self-directed IRA funds to invest in real estate.

Additional Real Estate Articles by Morris Invest

If you’re brand new to real estate investing, or you’re a seasoned investor, you can always benefit from increasing your knowledge base. With that said, check out the resources below:

Take Control of Your Money with a New Construction Cost Segregation Study

Wise real estate investors utilize the power of cost segregation studies to reclassify their new construction assets on their single-family homes and duplex real estate projects. This incredible tax strategy saves them thousands of dollars in the early life of the property. As well as gives them the freedom to allocate those funds towards other real estate investments if they see fit. The alternative is not doing a cost segregation study and sending thousands of dollars to the government. It just makes sense!

Book a quick call and let Morris Invest help you with all the details of a new rental property construction project and built-in cost segregation study.

To learn even more, listen to our “Understanding Cost Segregation -Interview with David Brizel” podcast.

Before you leave, have a look at our Cost Segregation Tax Hacks: Investing for Beginners video:
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