Cost Segregation is made to take advantage of Tax reform under the Tax Cuts and Jobs Act which has boosted bonus depreciation from 50 percent to 100 percent, and this new law also allows bonus depreciation on qualifying used property.
The Cost Segregation process identifies triple net NNN property assets into their components and their specific values; and further classifies them for federal and state tax purposes. This Cost Segregation strategy can reduce actual tax liabilities for NNN property investors and is permitted by the IRS.
Real estate NNN property assets gradually wear out and lose value and so, any property related to business is eligible for tax deductions using a depreciation schedule. Under conventional taxation, the depreciable life of a commercial building is 39 years and that of a residential property 27.5 years. However, by using accelerated depreciation, investor tax payers can re-classify the improvement of buildings and NNN property – into components – each with depreciable life of 5,7,15, 27.5 and 39 years!
Cost Segregation is an engineering-based tax accounting technique, which identifies, classifies, and segregates real NNN property(triple net NNN property assets, Real estate NNN property, insight into Cost Segregation and advisors at Triple Net Investment), leading to a shorter period of depreciation and accelerated cost recovery. The components that investors can reclassify for accelerated depreciable lives include electrical installations, carpets, plumbing, specialty wiring, mechanical components etc. Cost Segregation creates new buckets of tax money that investors can invest immediately if not limited by passive loss tax rules.
Effectively, the total $$ amount of depreciation remains the same as under conventional taxation, however, Cost Segregation enables a tax payer to recover more cost in the early years via accelerated depreciation, thus releasing greater cash for investment over a longer period of time.
Although this is a very effective strategy to reduce tax liabilities and even defer taxes, for NNN properties, it remains little understood and therefore, little used. Many investors fear an IRS audit could reveal incomplete compliance, posing a risk to their business, and hence, hesitate to adopt it.
And remember:
- Investors should factor in additional ordinary income depreciation recapture taxes that are payable when selling the components of real NNN property that benefited from the cost segregation study.
- Investors can like-kind exchange investment property, but should consider the impact of having to pay taxes on any property not considered real property because of a cost segregation study (a downside of tax reform).
- The cost of the study should not consume most of the tax savings.
Use the expert guidance of your trusted advisors at Triple Net Investment Group to get insight into Cost Segregation for your NNN properties, call or email us today!
