Are You Doing Your Taxes Wrong?

If you aren’t using Cost Segregation, not only are you leaving a lot of money on the table every tax season, but you are doing your taxes wrong. Find out why!

Are you a residential real estate investor? You’ve probably heard that a Cost Segregation Study can dramatically lower your tax obligation. But maybe you think it’s too complicated or doesn’t apply to your business. Perhaps each year, you think, “I’ll look into it next year,” but then never get around to it. Not only are you leaving lots of money on the table every tax season, but if you aren’t using Cost Segregation, you are doing your taxes wrong.

How Does Cost Segregation Benefit Residential Real Estate Investors?

In residential real estate, assets typically depreciate over 27 ½ years. But you don’t need to wait 27 ½ years to take those deductions. Instead, you can accelerate them with a cost segregation study. This is a detailed look at your assets that then allocates them into their proper depreciation category. According to the IRS, many assets depreciate in 5 years, 7 years, and 15 years.

Why Do Assets Depreciate at Different Rates?

Things wear out at different rates, so the tax code reflects that. For example, consider that carpeting doesn’t last 27 ½ years. It usually needs to be replaced in 5 years, especially in rental property, so that you can accelerate the depreciation to 5 years.

When you purchase a residential investment property, you buy more than just the land and the structure itself. You also buy appliances, fixtures, toilets, carpeting, water heaters, even electrical work. All those things need to be allocated to the correct depreciation schedule.

Isn’t Cost Segregation Only for Large Corporations?

No. Thanks to the Tax Cuts and Jobs Act and the new bonus depreciation rules, cost segregation studies began to benefit residential real estate investors in a big way! Often, the deductions offset a real estate investor’s income to the point that their tax burden is not only eliminated, but there are excess deductions that roll over to the following tax year.

What If I have been Doing My Taxes Wrong for Several Years?

While it is ideal to do a study the year after purchasing a property, you can benefit from a cost segregation 3, 5, or even ten years later! Unlike other changes to past filed taxes, you won’t need to amend your tax return. Instead, you use a 3115-tax form to let the IRS know that you have been taking straight line deductions, and now you will accelerate those deductions. You can then put all of the depreciation you missed over the years you have owned the property on your current tax return.

But Is it Really Wrong to Take Straight Line Deductions?

On tax form 3115, you have to check a box that says, “Impermissible method to permissible method.” So while the IRS will never encourage you to take your depreciation, you should be depreciating your assets correctly.

It’s Not Too Late!

The experts at M&E Cost Segregation are here to help.

Contact us today

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