Beyond The 1031 Exchange: Cost Segregation Analysis

You've completed your 1031 exchange. You've deferred the payment of your income taxes. Now what?

Have you thought about doing a cost segregation analysis or study? It could provide you with significant income tax benefits in the form of higher depreciation write offs.

Cost Segregation Analysis

The general theory here is that you have acquired an interest in real property, but some of the real estate can actually be broken down into personal property components such as HVAC units, etc.

The cost segregation analysis does just that. A cost segregation provider studies the components of the building and then segments it into real property and personal property interests.

Increased Depreciation Benefits

Personal property has a much shorter life span, and as such, has a much shorter depreciation schedule. You can depreciate personal property much faster than you can real property and create more in income tax write offs to shelter more of your income.

Future Issues

The decision to complete this cost segregation analysis is not an easy one because the cost segregation analysis can also complicate matters later. For example, you have just completed a 1031 exchange and acquire "real estate." But, you then complete a cost segregation analysis and split it into real estate and personal property. Later you go to sell the property and the question is what are you selling? Is it real estate? Is it personal property? Is it both? Will the IRS allow you to have your cake and eat it too?

Financial and Tax Advisors

Always consult with your advisors before completing a cost segregation analysis to determine if the outcome is more beneficial than the long-term issues.