Tax Reduction Through Cost Segregation for Apartments
Tax reduction and tax deferral are the primary benefits of obtaining a cost segregation study. Federal tax reduction is beneficial to multi-family investors and can be achieved by taking advantage of various tax deductions that the IRS allows. For example, cost segregation generates substantial tax benefits for apartment owners, including federal income tax reductions and deferred payment of taxes. It generates these tax reductions and tax deferrals by increasing depreciation, a crucial non-cash tax deduction for commercial real estate investors.
Cost segregation generates tax reductions by converting the character of income from ordinary income (35% maximum tax rate) to capital gains (15% maximum tax rate). It also defers payment of taxes until the year when the apartment complex is sold (assuming there is no 1031 exchange).
The following table summarizes the proportion of the improvement cost basis which can typically be allocated to short-life property for apartment owners:
Typical Portion of Improvement basis by Life-Category
- 5 years
- 7 years
- 15 years
- 27.5 years
The IRS recognizes that some items physically depreciate over a shorter period of time. It is intuitive that carpet, vinyl tile, parking lot striping and paving will physically depreciate more quickly than the building structure. Cost segregation affects a higher level of depreciation in the early years of ownership since the portion of the basis identified as short-life property depreciates more quickly than long-life property. The result is tax reduction that will be substantial the first year as well as subsequent years. The following table illustrates this point:
| Life (years) |
Annual Percent of Depreciation |
| 5 year |
20% |
| 7 year |
14.3% |
| 15 year |
8.7% |
| 27.5 year |
3.6% |
Apartment owners can keep more of their income by utilizing cost segregation to increase depreciation. It will both reduce income taxes and defer payment of taxes.
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Cost segregation produces tax deductions and reduces federal income taxes across the country and in every size market. Below are just a few examples of where cost segregation generates meaningful tax deductions.
City:
- Baltimore, MD
- New Orleans, LA
- Denver, CO
- Dallas/Ft. Worth, TX
- Hartford, CT
- Phoenix, AZ
- San Francisco, CA
- Memphis, TN
- Las Vegas, NV
- Houston, TX
- Fresno, CA
- Springfield, MA
- Louisville, KY
- St. Louis, MO
- Greenville, SC
- Portland, OR
- Youngstown, OH
- Boise, ID
- Poughkeepsie, NY
- Oxnard, CA
- Detroit, MI
- Buffalo, NY
- Syracuse, NY
- San Antonio, TX
- Stockton, CA
- Columbia, SC
- Allentown, PA
- Portland, OR
- Akron, OH
- Chattanooga, TN
Cost segregation produces tax deductions for virtually all property types.
Property Type:
- Funeral home
- Amusement park
- Hospital
- Country club
- Vacant land
- School
- Self-storage
- Shopping mall
- Research and development
- Motel
Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.
Industry:
- Electronic and appliance stores
- Food manufacturing
- Mineral product manufacturing
- Textile product mills
- Machinery manufacturing
- Furniture stores
- Metal manufacturing
- Food and beverage stores
- Publishers
- Furniture manufacturing
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