How Does Cost Segregation Work for Residential Real Estate?

Cost segregation in real estate is a way for real estate investors to deduct from their taxes the amount of depreciation or the decline over time of the value of their property. Real estate cost segregation presents an opportunity for property owners to pay fewer taxes and invest that money into other ventures that can provide the investor with something else of value. How does cost segregation work for residential real estate? 

What Are the Benefits of Cost Segregation in Real Estate?

Cost segregation for residential real estate matters when an investor owns those residential properties to make an income. For example, a multi-family apartment building might qualify for a cost segregation study in real estate, as would a mixed-use condo building with retail space on the bottom floor.

There are many reasons why someone might choose to undergo cost segregation for a residential property that they own, including:

  • The desire to have more funds upfront and at the beginning of their real estate investing journey, when an investor might not have as much money to work with as they will in a few years 
  • The hope of paying fewer taxes on an investment by employing this by-the-book method of accounting
  • The ability to see the true value of all the components of the property, such as the roof, plumbing system and land

When an owner or investor is able to pay fewer taxes and has more cash flow to their name, they are better able to do things such as make repairs and perform maintenance on the property in a timely manner. Investors began seeing significant savings via cost segregation after the 2017 authorization of the Tax Cuts and Jobs Act

What Goes Into a Cost Segregation Study?

A cost segregation study in real estate looks at several components to find areas where an investor can save money, or reduce their tax liability, when it comes time to do their taxes. These components may include things such as:

  • The land surrounding the structure
  • Anything inside the condo or apartment, such as lighting fixtures, flooring and furniture, if the investor owns those pieces 
  • The structure itself, which includes the electrical wiring, windows and more 

One of the downsides of performing a cost segregation analysis in real estate is that a study can take several weeks to complete, so it is not a way to get quick and easy access to cash. In addition, the study itself can cost a few thousand dollars. However, the benefits of the analysis last for years to come in addition to the year the investor performs the study. 

Interested in Cost Segregation for Real Estate?

If you are an investor or property owner interested in delving into a cost segregation study or simply wanting to learn more about the process, contact KBKG to speak with one of our financial professionals today. Cost segregation in real estate can be a complicated process, especially if an investor owns a large or multi-use residential property, and we can help ensure that the process goes as smoothly as possible.