As someone in the cost segregation industry, I have heard my fair share of misconceptions about it. It’s a complicated tax strategy—I get it!
What’s unfortunate is that sometimes those misconceptions can deter folks away from cost segregation, even though it could make sense for them to use it.
My advice? Don’t leave money on the table!
Demystifying Cost Segregation
One of the biggest cost segregation misconceptions I have heard is, “The building’s basis is too low for a study.”
Now, some may say that cost segregation would make sense only for buildings over $1 million in basis; however, the good news is, that’s not true.
In fact, cost segregation studies can be done on buildings under $500,000 in basis.
You get cost seg! And you get cost seg! Cost segregation for everyone! (Channeling my inner Oprah.)
As a real estate investor, there’s a good chance you own property under $500,000 in basis (after land has been carved out). You may think that a cost segregation study wouldn’t make economic sense—which is true!
However, the good news is there are “economical” solutions out there that are more cost-effective than a full-blown cost segregation study.
Cost Segregation for Lower-Cost Buildings
Here’s an example of a cost segregation study on a building under $500,000 in basis. This study, in particular, was done on a single family residence. The building was placed in service in 2016 with an original basis of $94,180.
Prior to cost segregation, this building accumulated $5,851 in depreciation deductions. Post-cost segregation, $9,128 of additional depreciation deductions were added, bringing the total accumulated depreciation to $14,979. Way better than not doing a cost segregation study, right?
The Engineering Approach is the Best Approach
If you do end up choosing an economical solution to a full-blown study, it is important to note that choosing a solution that is “as close to the real thing” is imperative. Just because your property isn’t worth millions doesn’t mean you should skimp out on quality.
The trick here is to ensure that the solution you’re using utilizes an engineering approach. You’ll know that the solution you’re using utilizes this approach if the study accounts for all aspects of an item.
In other words, are you including the square footage of the carpet? The exact number of cabinets? It’s all about the details. I think you get the hint!
Contrary to popular belief, it is possible to mock a cost segregation study on a building under $500,000 in basis if you choose the right methodology and software.
Just remember, the key takeaway here is to ensure that whichever solution you choose is based off an engineer approach, as this will help ensure your study will be defensible in case of an audit.
Do you have any further questions about this concept?
Ask me in a comment below.