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Is a Cost Segregation Worth it?

If you’re planning on investing in a new construction rental property, and you’re considering different tax-saving strategies, you may be wondering – Is a cost segregation study worth it? If this is the case, you’re ahead of the game. Why? Because a cost segregation analysis is an incredible money-saving strategy that many real estate investors are not even aware of.

It can literally save investors thousands of dollars, allowing them to free up their money to invest in other performing assets. This, in turn, can give them the ability to significantly grow their portfolio.

Let’s get a little more specific with the answer to the question at hand:

Is a Cost Segregation Study Worth It? Performing a cost segregation analysis is beneficial to real estate investors, as it allows for greatly accelerated depreciation of certain components of the property they are acquiring. This, in turn, can lower their tax burden, increase cash flow, and free up funds to reinvest.

What is a Cost Segregation Study?

You may be looking into the question – Is a cost segregation study worth it? But at the same time, you may not be 100 percent familiar with what it actually is. A cost segregation analysis, as it pertains to new construction, is a complete study of the non-structural components of a piece of real estate, that separates, and places these components in certain tax classifications. Therefore, taking the components of the property out of, what is called a (real property section 1250 – which depreciates over the lifetime of the property), and reclassifying and moving them into what is called (personal property/land improvements section 1245 – with a quicker depreciation time frame).

A quicker depreciation time means not having to wait years to lower your taxes. It allows you to save thousands in taxes in the beginning stages of the life of the property.

If you would like to get a full overview of what a cost segregation study is, along with examples, take a moment to read over our detailed article titled – The Power of a New Construction Cost Segregation Study Can Save You Thousands.

Learn how you can lower your taxes using this strategy by watching this quick video with Clayton, the founder of Morris Invest.

 

3 Reasons Why a Cost Segregation Study is Worth it for New Construction Rental Properties

At this point, you are most likely starting to realize the immediate tax savings that can come about when a cost segregation study is performed, and that the answer to the question of whether or not it’s worth doing a study such as this, is a definite yes. With that in mind, let’s dive into a few reasons why a cost segregation analysis is worth it.

The following benefits pertain to new construction studies conducted on duplexes, single-family, and multi-family homes:

1. Smart Tax Strategy – Adjusts time frames of deductions allowing for faster depreciation rates

This is one of the main benefits of doing a cost segregation study because it can literately save you thousands of dollars that you don’t have to wait years to cash in on. How is this possible? When you utilize a cost segregation study with new construction rental properties, depreciation time frames are accelerated, and therefore, your tax savings are greatly accelerated.

If a study is not performed, everything pertaining to the property would be lumped into the traditional 27 1/2 depreciation time frame. Imagine waiting 27 years to get the remaining funds from the depreciation that you are entitled to, when you could have received a portion of it the same year the property was paid for because a cost segregation study was conducted.

Breaking It Down into Categories

When a study is done, the components of the property are separated into three categories to determine their depreciation time frames. (1) The Building Structure, which has a 27 1/2 year depreciation time frame, and can include items such as plumbing, roofing, electrical, windows, doors, HVAC system, the foundation, and the like. (2) Land Improvements or Site Work, which has a 15-year depreciation time frame, and includes such things as fencing, driveway, patio, and landscaping. (3) The third category is Personal Building Components, which has a 5-year depreciation time frame, and includes such things as furniture, window treatments, carpeting, appliances, and the like.

Along with lowering your taxes with a cost segregation study, you can learn all about other strategies that will help lower your taxes with this book you can purchase from Amazon – Tax-Free Wealth. It’s an excellent read and we recommend it to all our fellow investors.

2. Benefit Financially from Land/Site Improvements that are Specific to New Construction Projects

When investing in a rental property that is a new construction project, as compared to purchasing a newly renovated house, you are permitted to take advantage of items that are classified as land improvements and site work. The depreciation time frames of these items can be accelerated. This typically can’t be done with existing renovated properties because the site work and land improvements have already been depreciated. This makes combining a new construction rental property and a cost segregation analysis financially advantageous.

Take a moment to hear more about land/site improvement savings:

 

3. Provides Detailed Documentation of Classifications and Costs for Possible Audits

If you’re a real estate investor who has previously been audited, then you can certainly appreciate how this can make a cost segregation study worth it. A detailed study will provide you with an extremely thorough audit trail that will make your life so much easier.

A cost segregation study report that summarizes the results can be prepared, and is deemed helpful by the IRS for audit purposes. Information in the report would include such things as:

  • An explanation of the methodology used in the study.
  • All details pertaining to the assets that were classified in the analysis.
  • List of the asset classes and their recovery periods so they can then be easily checked for proper classification by the auditor.

If you purchase a new construction rental property and have a cost segregation performed, any audit that comes your way will be a breeze – not many people can say that!

Can You Do Your Own Cost Segregation Study?

If you have some experience on the subject, or have time to do the research, perhaps you could do your own cost segregation study, but it’s not recommended.  Too much money is on the line to let yourself be subjected to possible costly mistakes.

Making mistakes can actually be an easy thing to do because cost segregation studies contain factually intensive decisions and details that rely on knowledge and experience with complex tax laws, as well as construction, and engineering analysis.

If you feel you might want to do the study yourself to save money, believe us, you will keep a lot more money in your pocket if you have a professional do the job for you. Cost segregation engineers are experienced at knowing how to save you the most money.

Why it’s wise to have an industry professional take care of the study for you:

1. Most investors are not experienced in “all things cost segregation”, but a professional analyst is – from knowing exactly how each component should be reclassified, to properly reading blueprints, architectural drawings, and mechanical and electrical plans, and having knowledge of bid documents, current tax laws, and more. Armed with all this experience and knowledge, a professional will do the study right the first time, and save you a tremendous amount of money in the long run.

2. Along with an expert knowing how to save you money, some cost segregation studies are provided with a bulk discount. This happens when multiple properties are built at the same time, with the same specifications. This saves you money right off the top. It also saves yourself possibly months of time-consuming work, if you were to do the study yourself. The bottom line is that time is money, so it can actually save you money to have someone do it for you.

3. Having a new construction cost segregation engineer do the study for you will ensure it’s completed in a timely manner. This will allow you to save money in the year you are attempting to lower your taxes in.

Dive into even more details on attempting to do a cost segregation study yourself in this video with Clayton Morris:

 

A New Construction Property Bundled with a Built-In Cost Segregation Study

In a perfect world, you would be able to invest in a new construction property that comes with a cost segregation analysis. Fortunately, this is actually possible. Morris Invest, a full-service real estate company, provides exceptional rental properties with cost segregation studies built right in. This makes things super simple for the investor because Morris Invest takes care of the study for you. We also take care of everything else pertaining to the property – even filling the rental with a reliable tenant, and placing an experienced property manager.

Clients who have purchased rental properties through Morris Invest are relieved to find that the time consuming and often confusing process of performing a cost segregation study was already done for them.

For those who are seeking out funding to invest in a newly constructed rental property, we suggest looking into unsecured business credit cards where you fund projects with them at 0% interest. You can learn more about this on our Fund & Grow Page. You can also dive into our post titled Fund & Grow Review – Best Unsecured Credit for Real Estate Investors.

Additional Rental Real Estate Investment Articles by Morris Invest

If you have some free time, grab a cup of coffee and dive into these additional real estate articles that we put together:

Is a Cost Segregation Study Worth It? We Certainly Think it is!

If you’re considering investing in a new construction rental property, and you’re impressed with just how much a cost segregation study can save you in taxes – allowing you to hold on to more of your money instead of sending it to the IRS; Morris Invest can help.

We have been around the block a few times, we get it, and realize that a cost segregation study is worth it, to the point that we include it with our new construction properties. With that in mind, feel free to schedule a call with Morris Invest. We can answer any question you may have, provide you with a rental property that includes a cost segregation analysis, and make your dream of owning a cash flowing rental property a reality!

Before you go, feel free to hear from a few of our clients as they tell their amazing stories in our latest interview series: 

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