Buying Real Estate? Understanding the Benefits of Cost Segregation

What if there was a way to accelerate your depreciation on commercial property and save tens of thousands of dollars in taxes right away? This strategy is called cost segregation, and while it’s well-known among tax professionals, very few property owners actually implement it.

Here’s what you need to know about this powerful tax strategy. Doctor’s Choice Practice Transitions works with dentists navigating real estate decisions, and understanding cost segregation can be a game-changer for practice owners who own their buildings.

What Cost Segregation Is and How It Works

Your commercial property can currently be depreciated over 39 years, which means minimal tax savings each year. A cost segregation study separates the components of a building into different asset classes so they can be depreciated over shorter time frames, allowing you to realize more tax savings now.

Dental offices are uniquely positioned to benefit from cost segregation because they contain a wide range of specialty equipment and interior buildouts. Dental chairs, X-ray equipment, plumbing for operatories, cabinetry, and lighting are examples of components that can be classified into 5-, 7-, or 15-year depreciation schedules, allowing you to show more depreciation immediately and reduce your tax burden.

Potential Tax Savings

Unlike a 1031 exchange or other popular real estate tax strategies that have specific guidelines and strict timelines, you don’t have to designate that you’re doing a cost segregation study prior to purchasing real estate. This is something you can do immediately after a purchase or even years later.

The tax benefits can be substantial. As a rule of thumb, 20% to 40% of a commercial property built out for dental use can often be reclassified into accelerated depreciation schedules. For example, if you purchase a building for $1 million and a cost segregation study allows $250,000 to be moved into shorter-life property, you could gain more than $80,000 in additional deductions in the first year alone.

How a Study Is Performed

There are specialized companies that conduct cost segregation studies, and they generally cost $3,000 to $5,000, depending on the size of the property. More importantly, these companies can give you a general estimate of potential savings before you hire them.

Clients who go through the estimate process rarely choose not to move forward with the study. While cost segregation can deliver significant tax savings, be aware that depreciation recapture may apply if you sell the property in the near future. This is something to discuss with your tax advisor when evaluating the strategy.

Ready to Explore Cost Segregation?

If you own commercial real estate for your dental practice and haven’t explored cost segregation, now is the time to learn more. The potential tax savings can be substantial, and the process is more straightforward than many dentists realize.

Doctor’s Choice has connections to professionals who have successfully helped clients implement this strategy. If you’d like a referral to a specialist in cost segregation studies, reach out via our contact form.

DISCLAIMER: We are not an accounting firm, nor are we giving tax advice. If you are interested in this tax strategy, we always suggest that you consult with your accounting team.