What is a Cost Segregation Study?

What is a Cost Segregation Study?

May 11, 2023

What is a cost segregation study? Paul L. Moffat, President and Senior Financial Planner at Arista Wealth Management, explains in the newest episode of Arista Advice!

Full transcript:

Hello, welcome to Arista Advice! Question of the week is: "Paul, what is a cost segregation study?" Well, a cost segregation study is a big word and a big term. Don't get lost in it.

A cost segregation study is where a business owner who owns their own building - a doctor, physician, surgeon, dentist, they own their own building. They're able to go into the tax code and on year of purchase and up till three years of purchase, they can go and recapture a part of the tax code that incentivizes business owners to become landowners. Remember, the US tax code is built for business owners and also real estate investors and investment investors. One of the parts is the cost segregation study. The government gives you a tax credit upfront, you capture it, and you can accelerate the depreciation of the building that you're buying. Don't worry. Of course Paul's got an example for you.

Look at this illustration right here. If you bought a building for $2 million, the land is $400,000 and the structure, the building, the windows, the wall, the carpet, the sink, everything inside is valued at $1.6. What a cost segregation study does is it enables you to go to the $1.6 million and take that asset and put it in three separate buckets. That first bucket is five to seven years. You can take that amount and accelerate it and get a lump sum depreciation on your tax return that first year of acquisition, or going back the last two years to capture that to offset rental income that you may have.

Remember, talk to your CPA and other tax advisors to help you optimize a cost segregation study. Those studies cost anywhere from $5,000 to $10,000, but can give you a $200-$250,000 to $300,000 tax savings. Remember, go to AristaWealth.com to get other videos, tools, tips and resources to help you live a life of significance.