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Cost Segregation for Commercial Real Estate
Learn about cost segregation analysis, a tax strategy used by commercial property owners.
Cost segregation for commercial buildings is like adding a supercharger to a performance car, in terms of boosting already favorable income tax provisions for real estate investors. Real estate is a large part of the economy and has received favorable tax statutes since before the 1950s. Both the magnitude of the real estate industry and its plethora of lobbyists (commercial developers, construction trades, bankers, appraisers, Realtors®, etc) are material factors in providing excellent income tax protection for commercial real estate investors.
Some commercial real estate investors have initially been reticent due to the high payoff ratios of cost segregation for real estate. Year-one pay back ratios are often 10:1 to 100:1. (In other words, a 1,000 to 10,000% return, not counting possible recapture.)
Advantages and disadvantages of cost segregation
- A. Massive depreciation in the early years leads to massive tax savings
- B. Additional gain on sale, if a sale occurs prior to the property going into an estate
- C. Additional gain is typically capital gain contrasted to using the additional depreciation to offset
The U.S. government promulgates income tax statutes for two purposes:
- To raise revenue and
- To impact social and economic behavior.