What is cost segregation and how can property owners use it to maximize depreciation deductions and minimize the tax burden for property owners? How is it different from straight line depreciation?
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Typical depreciation is straight line depreciation that allows you if you have a single family residence to be able to allocate the cost of the property, not the land, but the actual building across 27 and a half years if it's a single family or one to four residential. But if it's a commercial property, which is five doors or more, five units or more, then it's across 39 years.
So what cost segregation study does is, it categorizes the certain elements of a building that the IRS says that you can take a tax deduction for across a five-year timeline, a seven-year timeline, or a fifteen-year timeline. And those categories are then put into the report so that you can say, "here's an allocation of things and items that you can take bonus depreciation or accelerated depreciation on". Meaning not thirty-nine years but five years, seven years, or fifteen years. And it significantly impacts your taxes. We had mentioned that on average it's 20 to 30% that you can take for every like $100,000 investment. You're probably going to get a $20,000 to $30,000 write off just by doing a cost segregation study like this. Eventually what's the IRS going to do? Then they're going to want depreciation recapture. Everything that you took off and you wrote off and all of these losses, eventually that affects your cost basis and how much you already got back from them and how much they're going to want to then tax you. We actually talked about this in the tax benefits for real estate investors episode. And we talked about current law and the current percentages, depending on which tax bracket that you're in. We went into more detail, we're not going to repeat ourselves here. But it really depends on what's the tax law today as to what you can actually write off and how it all affects you and when it comes to the recapture.
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