HOW COST SEGREGATION CAN ACCELERATE DEPRECIATION
Illustrative apartment building example (no bonus depreciation)
STARTING EXAMPLE
PURCHASE PRICE: $1,200,000
LAND ALLOCATION: $200,000
DEPRECIABLE BUILDING BASIS: $1,000,000
WITHOUT COST SEGREGATION
WITH COST SEGREGATION
Reclassified assets generate about $45,000 in year 1 instead of about $10,909
Extra first-year depreciation from cost segregation: about $34,091
Illustrative example only. Assumes residential rental property, no bonus depreciation, and the half-year convention for reclassified assets. Actual results depend on placed-in-service timing, depreciation method, conventions, and tax circumstances. Consult a qualified tax advisor.
A SIMPLE EXAMPLE FOR APARTMENT OWNERS Assume an investor buys an apartment building for $1,200,000 and allocates $200,000 to land. The remaining $1,000,000 building basis would generally be depreciated over 27.5 years, creating about $36,364 in full-year annual depreciation before other adjustments.
as a 5-year property and $100,000 is classified as 15-year property, the first-year depreciation could be significantly higher depending on the depreciation method, placed-in-service timing, convention, and bonus depreciation eligibility. Without bonus depreciation, the first-year depreciation on the reclassified assets would follow the MACRS tables. If the half-year convention applies, 5-year property is depreciated at 20% in year one, and 15-year property is depreciated at 5% in year one.
If a cost segregation study identifies 30% of the depreciable building basis, or $300,000, as assets that can be depreciated over shorter lives, those assets may be reclassified into 5-year, 7-year, or 15- year property. For example, if $200,000 is classified
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