Cost Segregation

Lately, I’ve been thinking about missed opportunities in life. When the planets didn’t align, or the timing just wasn’t right. This brought back cringe memories like missing obvious hints from women, aloofly rejecting invites for private networking dinners, etc. I sit here pondering how many of our missed opportunities have shaped us for the better.

You could argue that not taking that job, or not asking out your crush was the best thing that’s happened: you’re here at this point in life — right?

Here’s a lesson I learnt at 25: Don’t value advice from people who don’t have their priorities figured out. They wouldn’t see an opportunity if it threw up on them — they’re content with below average because “what’s the point of doing more?”

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I personally only heard about Cost Segregation recently; turns out not a lot of real estate investors are aware of it. BUT, CS is arguably one of the most powerful tools in your tax arsenal; especially when combined with a 1031 Exchange.

Take the below content with some skepticism — I’m still learning about CS.

So what is Cost Segregation? It’s accelerated depreciation… on steroids.

For some context: Whenever you purchase a property, Uncle Sam allows you to depreciate it across 27.5 years for your taxes. Here’s an example: You purchase a property for $100k in year 1. For the next 27.5 years, you’re able to depreciate $3,636 ($100k/27.5) to deduct from your taxable income every year.

Same story with CS: You buy a property for $100k and decide to use CS for tax savings — BUT, now you can depreciate parts of the building within a condensed 5 year span. Let that sink in. You’re condensing 30 years of depreciating expenses into a 5 year window… God Bless America :)

Cost Segregation may sound like the best thing to happen to real estate investors since free money, but with anything in life — there’s a lot of nuance to it. There are special CS firms you need to hire in order to conduct an analysis of your property to appropriately breakdown its total value. For example, a $100k property may have $80k of its value from the land itself and not the actual structure; this is relevant because CS varies how much of each category you can depreciate (land, building, personal property, and land improvements).

Let’s go back to our $100k example: Assume after the CS study, the land value & personal property are 10% & 20% each. Meaning there’s a combined $30k you can now depreciate over a 5 year period = $30k/5 = $6,000. That’s almost double the initial $3,636 amount we had!

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Cost Segregation can be a powerful tool to help both generate wealth and scale faster for individual and institutional investors. Unfortunately, not too many people are familiar with this tax strategy — there are caveats to this program as well that I haven’t been able to cover in this post. Things such as minimum requirements, tax repayments, etc. all need to be considered too which we’ll explore in following posts.