Tax Deferral and Cost Segregation – Five–Year Property
Tax deferral and tax reduction are two results from a cost segregation study real estate investors can use to reduce federal income taxes. Tax deferral and reduction are affected by increasing real estate depreciation (a non-cash tax deduction). The tax deferral delays the payment of taxes until a future date.
More real estate investors split the cost basis of real estate between land and long-life property. Long-life property is depreciated over 39 years for most commercial property (office, retail and warehouses) and over 27.5 years for rental residential property (houses and apartments).
Depreciation is the key tax deferral benefit for real estate investors. Depreciation can be increased in the first 15 years of ownership by allocating part with the cost basis to five, seven, and 15-year property. About 20% to 40% of the cost basis of most real estate can be allocated to five, seven, and 15-year property.
Let’s consider an example here:
Ann purchased an office building for $4,000,000. If she obtains a cost segregation study, $600,000 of the cost basis can be allocated to five-year property. Annual straight-line depreciation for this portion of the property would be $128,000 with a cost segregation study and $15,385 without it, resulting in increased tax deferral. Annual depreciation (for this portion of the property) would increase by $104,615.
The above example only addresses the effect of shifting $600,000 from 39-year property to a five-year property. This is done for illustrative purposes. It does not calculate total depreciation or tax deferral benefits for the building.
Another tax deferral perspective is to consider the amount of the cost basis, which is depreciated annually (based on straight-line depreciation).
| Type of Property |
% Annual Depreciation |
| 5 year |
20% |
| 7 year |
14.3% |
| 15 year |
8.7% |
| 27.5 year |
3.6% |
| 39 year |
2.6% |
Examples of typical five-year property include:
Since short-life property depreciates more quickly, it generates substantially more tax deferral and reduction than long-life property.
Cost segregation provides both tax reduction and tax deferral.
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Cost segregation produces tax deductions, provides tax deferral and reduces federal income taxes across the country and in every size market. Below are just a few examples of where cost segregation generates meaningful tax deductions.
City:
- Dallas/Ft. Worth, TX
- Denver, CO
- Las Vegas, NV
- New York, NY
- Atlanta, GA
- Houston, TX
- Phoenix, AZ
- Bridgeport, CT
- Boston, MA
- New Orleans, LA
- Richmond, VA
- Omaha, NE
- Springfield, MA
- Oklahoma City, OK
- Kansas City, MO
- Nashville, TN
- Bakersfield, CA
- Albuquerque, NM
- Honolulu, HI
- Albany, NY
- Knoxville, TN
- Manchester, NH
- Louisville, KY
- Lakeland, FL
- Greensboro, NC
- Milwaukee, WI
- Detroit, MI
- Poughkeepsie, NY
- Charleston, SC
- Virginia Beach, VA
Cost segregation produces tax deductions for virtually all property types.
Property Type:
- Airplane hangar
- Car wash facility
- Medical facility
- Supermarket
- Mini-warehouse
- Single-tenant retail
- Motel
- Cold storage facility
- Commercial building
- Hotel
Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.
Industry:
- Textile mills
- Publishers
- Warehousing and storage
- Apparel manufacturing
- Textile product mills
- Mineral product manufacturing
- Fabricated metal products
- Amusement parks
- Transportation equipment manufacturing
- Food and beverage stores
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