A Novel Tool: Cost Segregation Studies Can Produce Extra Benefits

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Tax Credit Advisor — July 2012 — Owners and developers of low-income housing tax credit projects (LIHTC) looking to generate larger tax deductions to offset current taxable income, negotiate investor yield issues, or resolve certain Year 15 LIHTC issues may wish to explore getting a cost segregation study for their property. The additional benefits can outweigh the costs of a study, which can be utilized by those constructing, purchasing, renovating, or expanding any kind of real estate. Cost segregation is the process of analyzing all of the physical components of a real estate property (e.g., a building) and reclassifying many of the components, for federal tax purposes, as assets with shorter tax lives. The end result is to accelerate (i.e. frontload) annual depreciation tax deductions, increase cash flow, and consequently defer federal and state income taxes. This contrasts with the standard approach of depreciating the entire building and its components over 27½ years (residential real estate) or 39 years (non-residential real estate). In his article, author Christopher N. Thomas of Reznick Group explains what cost segregation is and how many developers/owners may benefit from using it.

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TAGS: Affordable Housing; LIHTC; IRS/Tax Issues