THE OWNER MAY BE ABLE TO DEDUCT SOME OR ALL OF THE ELIGIBLE AMOUNT THROUGH BONUS DEPRECIATION.
A PRACTICAL COST SEGREGATION EXAMPLE Assume an investor purchases an apartment property for $4 million and reasonably allocates $600,000 to nondepreciable land. The remaining $3.4 million is the depreciable basis. If an engineering-based cost segregation study reclassifies approximately 30% to 35% of the depreciable basis into qualifying 5-year, 7-year, and 15-year assets, the amount eligible for accelerated depreciation would range from approximately $1.02 million to $1.19 million. If these assets satisfy the bonus depreciation requirements applicable to the property’s placed-in-service date, the owner may be able to deduct some or all of the eligible amount through bonus depreciation in addition to claiming regular depreciation on the remaining basis. This is a tax deduction, not a tax credit. The actual tax savings will depend on taxable income, ownership structure, passive activity limitations, elections, federal and state tax treatment, and the investor’s specific circumstances.
IMPORTANT LIMITS, TIMING, AND EXIT PLANNING
Cost segregation accelerates deductions; it does not eliminate tax rules. Apartment owners should consider:
• Passive activity and at-risk rules, which may limit when rental losses can be used. The IRS passive activity rules explain these restrictions. • Depreciation recapture and gain characterization when the property or shorter-life assets are sold. • The expected holding period, planned renovations, and whether accelerated deductions will be usable. • State depreciation rules, which may differ from federal treatment.
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