How Cost Segregation works and what is involved in a cost segregation study?

A Cost Segregation study involves identifying and reclassifying components of a property to shorten the depreciation timeline. This means certain assets that were initially categorized as part of the building's structure are reclassified as shorter-lived personal property or land improvements. The primary goal is to accelerate depreciation deductions, which can lead to significant tax savings in the short term. Our experts at Sunrise conduct a comprehensive study that examines the property's components, their values, and depreciation schedules to ensure compliance with IRS regulations.

Building Types and Cost Segregation: Varied Benefits

Cost Segregation is not a one-size-fits-all approach. The benefits you can reap depend on the type of building you own. Whether it's residential, commercial, retail, industrial, or hospitality. 

Each category offers unique opportunities for accelerated depreciation. Here's a quick rundown of how Cost Segregation can apply:

• Residential Properties: Multi-family units, apartments, and student housing can all benefit from Cost Segregation studies.
• Commercial Properties: Offices, medical facilities, and mixed-use developments can find substantial savings through reclassification.
• Retail Properties: Shopping centers, malls, and individual stores can all capitalize on shorter depreciation schedules.
• Industrial Properties: Warehouses, manufacturing facilities, and distribution centers often have hidden value in their components.
• Hospitality Properties: Hotels, motels, and resorts can unlock significant tax benefits through accurate classification.

‍What other benefits does Cost Segregation offer? 

• Average Tax Savings: Cost Segregation studies can lead to an average tax savings of 20-40% of a property's depreciable basis, but this percentage can vary based on factors like property type, size, and components.
• Depreciation Timeline: The standard depreciation timeline for commercial real estate is 39 years, while Cost Segregation can help you identify assets that qualify for 5, 7, 15, or 27.5-year schedules.
• Recapture Concerns: It's important to understand that the accelerated deductions from Cost Segregation may lead to recapture of deductions if the property is sold before the end of its original depreciation timeline.
• Retirement and Sale Benefits: When selling a property, a Cost Segregation study can enhance your negotiating position, making the property more attractive to potential buyers.
• Look-Back Studies: Even if you've owned a property for several years, a "look-back" study can help you capture missed deductions from previous years and amend your returns for potential refunds.
• Renovations and Retrofits: Properties that have undergone renovations, retrofits, or significant repairs can benefit from Cost Segregation by identifying newly installed assets that qualify for accelerated depreciation.
• Tax Deferral: By accelerating deductions through Cost Segregation, property owners can defer tax payments, freeing up cash flow for further investments or business expansion.
• Business Valuation: Cost Segregation can positively impact the valuation of your business by reducing your taxable income and increasing your business's value.

Industries and Cost Segregation: Who Can Benefit?

Virtually any industry that owns property can potentially benefit from Cost Segregation. This service is particularly advantageous for real estate investors, property developers, construction companies, hospitality providers, medical facilities, and businesses with extensive physical assets. If you own or operate properties in these or related industries, you may be leaving valuable tax savings on the table without exploring Cost Segregation.

Standing Up to IRS Scrutiny: Ensuring Audit Compliance

At Sunrise, we prioritize accuracy and compliance in all our services. Cost Segregation is no exception. Our experts ensure the study stands up to IRS scrutiny and adheres to all regulations and guidelines. We provide thorough documentation and analysis that supports the reclassification of components and the accelerated depreciation schedules. With our meticulous approach, you can confidently navigate any potential IRS checks or audits

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Reach out to Sunrise today to explore how Cost Segregation could make a significant impact on your financial strategy.