When a commercial property is purchased or constructed, a building asset is created and the dollars are entered into a fixed-asset system as 39- or 27.5-year property. Using the straight-line method, owners can take portions of the purchase as taxable income deductions each year of the schedule. Cost-segregation studies, which analyze the components that make up the building and assign these various components with recovery periods, can provide property owners with distinct tax advantages over the straight-line depreciation method.
Cost segregation is a process in which detailed entries are made in a fixed-asset system for all long- and short-life property. For instance, certain aspects of the property may be assigned a three-, five-, seven-, or 15-year tax life. These shorter lives are depreciated at an accelerated rate that dramatically increases taxpayers’ federal tax deductions. The impact of cost-segregation studies can be significant.
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