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How Cost Segregation Can Maximize ROI

Veritax Advisors

April 15, 2024

While many real estate investors focus on the home’s purchase price and rental income, overlooking potential tax benefits could mean leaving significant money on the table.

This is where cost segregation comes into play.

If you are unfamiliar with how cost segregation can maximize ROI, chances are it’s because most tax preparers do not recommend it. Below, we’ll explain this tax-saving strategy and help you determine if it is right for you.

Cost Segregation: A Simple Explanation

When you purchase an investment property, the IRS treats your building’s wiring, plumbing, the building itself, and other property components as assets that can be depreciated over time. This annual write-off allows you to recover the cost of those assets.

But here’s the thing: Using a traditional depreciation write-off, you would have to spread out those deductions over 27.5 years for residential or 39 years for commercial properties.

The benefit of cost segregation is that it allows you to identify specific components like equipment and fixtures and deduct their value over five to seven years. This approach lets you deduct more of your property’s value from your taxes upfront instead of waiting decades to deduct it all.

Why Should Investors Care About Cost Segregation?

Chances are you can already see the benefits of cost segregation, but let’s take a closer look at how accelerating the depreciation timeline can unlock substantial savings:

More Cash Flow

When you accelerate depreciation, you claim more deductions faster. This reduces taxable income in the early stages of ownership, allowing you to keep more cash to cover maintenance and renovations or expand your portfolio by investing in additional properties.

Increased ROI

What happens when you combine accelerated depreciation deductions with more cash flow? You get a better ROI.

Not only do you improve cash flow, but you also save on taxes in the short term. And if you reinvest, those savings will compound. Money saved today is generally worth more than the amount saved years later. Why? Because it can be invested and earn returns over time.

Competitive Edge

Real estate is a competitive environment, particularly in an era of low inventory, inflated prices, and rising interest rates. Cost segregation gives you a leg up on competitors who pay more taxes and have less capital to reinvest. That’s powerful.

Outsmart Rising Interest Rates

We can't predict the Fed's next move, but mortgage payments will increase if interest rates go up. It’s true that rising interest rates will still make financing more expensive. However, cost segregation may help you counteract the higher cost of rising interest rates by preserving more cash flow upfront.

How Does Cost Segregation Work?

If you are considering implementing cost segregation strategies, the first step is to consult with a specialist at Veritax Advisors to determine if your property is a good fit for a cost segregation study.

This initial process allows us to:

  • Identify the costs associated with a building’s purchase, construction, or renovation
  • Determine if your property is a good fit for a segregation study
  • Ensure you have taxable income, that you have purchased, constructed, or renovated a property in the last 20 years, and spent $250,000 or more on your investment

If you (and your property) meet these minimum requirements, we will begin the data collection process by reviewing appraisals, building plans, construction drawings, and purchase agreements. This is promptly followed by a site visit and analysis.

It’s worth mentioning that this process is typically most beneficial for those investors with significant tax liabilities and higher-value properties. Rest assured, we will help you determine if cost segregation is the right strategy for you.

Out-Invest the Competition: Contact Us Now!

Ready to unlock the full potential of your real estate investments? With over 25 years of experience, Veritax Advisors has the knowledge and IRS-compliant strategies to supercharge your property investments. We’ve helped thousands of clients succeed—let us do the same for you. Contact us today to learn more about the benefits of cost segregation!

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Let’s Connect

Start by scheduling a meeting for a free consultation. Let’s talk about the specialty tax programs that can equate to significant savings.