Unlocking Tax Savings Through Cost Segregation in Residential Rental Properties

Maximizing Deductions Beyond Traditional Depreciation

For owners of residential rental properties, whether single-family homes, duplexes, or multi-family complexes, the traditional approach to depreciation involves spreading deductions over a lengthy 27.5-year period. While this method is straightforward, it often leaves significant tax savings on the table.

Cost segregation is a strategic alternative that allows property owners to accelerate depreciation on certain components of their properties, potentially increasing first-year depreciation deductions by up to 40%. This method offers substantial immediate tax benefits, enhancing cash flow and profitability.

Case Study: Boosting Tax Savings with an $800,000 Residential Property

Consider an investor who purchased a residential rental property for $800,000 in 2022. Using the standard depreciation method, the owner received approximately $14,545 in depreciation deductions in the first year, which equated to about $5,091 in tax savings. However, by undertaking a cost segregation study in 2023, the property owner was able to reclassify certain assets, resulting in a $260,000 depreciation deduction. This reclassification translated into an impressive $91,000 in tax savings, assuming a 35% tax rate. This example illustrates how cost segregation can dramatically increase the tax benefits available to property owners.

Key Considerations for Implementing Cost Segregation in Residential Rentals

The effectiveness of a cost segregation study in maximizing tax savings depends on several key factors. The size and type of the property play a significant role, with larger properties and multi-unit buildings typically offering more opportunities for asset reclassification. However, even smaller properties can benefit from this strategy if they contain high-value assets such as upgraded appliances, custom fixtures, or extensive landscaping.

The condition of the property’s interior also affects the potential tax savings. Properties with modern finishes, high-quality installations, and extensive improvements generally provide greater opportunities for accelerated depreciation. Exterior features, including parking areas, driveways, and outdoor lighting, can further enhance the benefits of a cost segregation study.

While multi-family properties often provide larger overall deductions due to the number of units and shared facilities, single-family rentals can also see substantial benefits, especially when they include valuable exterior and interior components that qualify for shorter depreciation periods.

Reaping the Benefits with Experienced Guidance

The success of a cost segregation study lies in accurately identifying and reclassifying the components of a property from real property to personal property. This requires a precise analysis and a deep understanding of both the tax code and construction. At ThriveVista, our team brings many years of combined experience in engineering, specialty tax areas, and cost segregation. This expertise allows us to effectively guide property owners through the process, ensuring they maximize their tax savings.

Cost segregation is a powerful tool for property owners looking to enhance their tax efficiency and improve cash flow. Whether you own a single-family rental or a multi-unit complex, this strategy can unlock significant financial benefits. For those interested in learning more or exploring the potential savings for their properties, the team at ThriveVista is here to help. Reach out to us today for a FREE CONSULTATION and discover how we can assist in optimizing your tax strategy.

ThriveVista assists property owners in identifying tax-saving opportunities through cost segregation. We leverage our extensive experience in engineering, specialty tax, and market knowledge to develop practical strategies and implement customized solutions that maximize financial benefits for our clients.