How Cost Segregation Affects Your Taxes

It's tax season, so we are thinking a lot in the Rapp home about our tax responsibility, and ways to reduce our taxable income through this next year. Do you have those same conversations or thoughts in your home?

Enter: Cost Segregation!

What is Cost Segregation (CS)?

CS is a tax strategy that reduces your taxable income when investing in certain asset classes, based on the deprecation of that asset. CS separates certain aspects of a multifamily asset (think appliances, electrical, parking lot, exteriors) and reclassifies those aspects into shorter periods of time. So instead of all those aspects depreciating over decades, they may depreciate in 5, 7, or 15 years. When this happens, you are able to write off significantly more in the early years of being invested in the assets, reducing your overall taxable income. This may allow you to retain more of the cash flow each year, and can change the trajectory of your investment possibilities.

Who figures this out?

A Cost Segregation Study is required to complete the depreciation of an investment properly. These studies are completed by tax professionals, so please work with your CPA to get more details about this tax strategy, and to verify this is the right fit for your financial goals.

Is there risk?

With any tax strategy, it is not risk free! When the property is sold, the IRS will ‘recapture’ the accelerated depreciation and will tax those amounts, anywhere from 25-37%. This can be avoided in a variety of ways, including a 1031 exchange into another asset. Typically, the benefits of a cost segregation study outweigh the potential recapture at the sale of the property.

At Pinions Principal Partners, we will highlight cost segregation potential with any investment we bring to you. We want to ensure we are keeping every penny we earn, as much as possible, and we want that for you too! The tax burden for an average family can feel overwhelming and investing in multifamily assets are a great way to hedge against your taxable income over time.

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If you are interested in investing and expanding your wealth portfolio, multifamily real estate may be the gateway to additional streams of income and achieving your financial goals for your family. If you are ready to take the next step in your financial journey, schedule a call with us below and we will discuss your options!

God bless,

Kristin and Caleb