Tuesday, September 8, 2015

Cost Segregation and Residential Rental Property

Purchasers of residential real estate, like purchasers of commercial property, can gain faster tax benefits by using a popular asset depreciation technique called cost segregation. 

Using cost segregation, buyers are permitted to view a real estate acquisition as consisting not only of land and buildings but also of tangible personal property and land improvements. The tax savings come from accelerated depreciation deductions applied to the segregated classifications otherwise lost in the general application of whole costs assigned to buildings and land only.  

A taxpayer can use cost segregation when constructing residential real property, buying an existing one, or, in certain circumstances, years after disposing of one or a portion of one so long as the year of disposition is still open under the statute of limitations (see revenue procedure 2004-11).

The trick (and its law...this is not just a device to evade) is to segregate the costs into components, tangible property (whenever possible) and land improvements, most of which allow for shorter periods of depreciation, and hence provide for faster tax benefits associated with the related allowances. 

See more about costs segregation at: