Maximizing Real Estate Wealth in Texas

If you're looking for ways to maximize your return on investment, enhance your cash flow, and manage your tax liabilities more effectively, then cost segregation is a strategy you need to know about. Here's a deep dive into how this powerful tax strategy can benefit your investments in the Lone Star State. 

What is Cost Segregation? 

 

Cost segregation is a proven tax strategy that allows you to accelerate depreciation on certain property assets. Instead of depreciating your entire property over the standard 27.5 or 39 years for residential or commercial properties, respectively, cost segregation identifies and reclassifies personal property assets to shorter depreciation schedules. This can include items like landscaping, carpeting, appliances, and even certain building components, which can be depreciated over 5, 7, or 15 years. 

 

 

By accelerating depreciation, you can reduce your taxable income in the early years of property ownership. This means more cash in your pocket now, which can be reinvested or used for picking up that next property. 

Case Study: A large multi-family apartment complex was purchased in late 2023 in the Dallas area for $38.4 million as part of a 1031 exchange.  The cost segregation study was performed in the fall of 2024 for use on an extended 2023 tax return.  Excluding the deferred gain in the exchange, the property has depreciable assets of just under $30.4 million.  As a result of the cost segregation, which reclassified 26.8% of the assets as either 5-year or 15-year assets, the client was able to realize $7.1 million in first-year depreciation expense. 

 

The accelerated depreciation reduces your taxable income, which in turn reduces your tax liability. This is particularly beneficial for properties in high-growth areas of Texas like Austin, Dallas, or Houston, where property values and rental incomes are escalating. 

 

With lower taxable income, you're effectively increasing your return on investment. This can make the difference in deciding whether to hold or sell a property. In Texas's dynamic real estate market, every percentage point of ROI can be crucial. 

 

Under current tax laws, you might benefit from bonus depreciation, allowing you to immediately deduct a significant portion of the cost of qualifying assets. This can be a game-changer for property purchases, as well as new constructions or major renovations. 

 

Cost segregation allows for a detailed analysis of your property components. This reclassification can be especially beneficial in Texas, where the climate can lead to more frequent replacements or repairs of certain assets (like HVAC systems or roof materials).  A detailed cost segregation report will allow you to take advantage of “partial asset dispositions”  when worn-out building components need to be replaced. 

 

A professionally prepared cost segregation study provides a defensible position in case of an IRS audit. Given the recent increase in the number of IRS personnel, this peace of mind is invaluable. 

 

For Texas real estate investors, cost segregation isn't just a tax strategy; it's a comprehensive approach to managing your investment's lifecycle from acquisition through to disposition. Whether you're expanding your portfolio in urban centers or tapping into the growth of smaller towns, understanding and utilizing cost segregation could be your key to unlocking more value from your Texas properties.  Invest wisely, and remember, the right tax strategy can turn good investments into great ones. Here's to your success in the vast and varied Texas real estate market! 

 

The team at Veritax Advisors ensures compliance with IRS guidelines while maximizing your financial benefits. Partner with us to reduce your tax burden and uncover the full potential of your Texas investment property —book a commitment-free call today!