Real estate owners are improving cash flow by segregating costs.

For income tax purposes, most buildings must be depreciated on the straight-line method over 39 years. Residential buildings may be depreciated over 27.5 years, but that is still a mighty long time.

So businesses and investors are studying the costs of buildings they purchase or construct. They are breaking out the specific costs of components which can be depreciated (as personal property) over a much shorter time, such as five or seven years. This dramatically accelerates their tax deductions, and therefore accelerates their after-tax cash flow.

Items commonly separated for faster depreciation include: site grading and excavation, stonework, point of sale equipment, canopies and awnings, carpeting, concrete foundations, drive-through equipment, decorative interior lighting, food storage and preparation equipment, poles and pylons, equipment installation costs, office furnishings, window treatments, wall coverings, signage, music and PA systems, exterior lighting, upholstery, and restaurant décor.

Due to the complexity of today’s construction projects, the IRS looks for accounting and engineering professionals to work together to carefully identify those costs which may be depreciated as personal property rather than as real estate.

Bonus depreciation may also apply to new components in the year they are placed in service. This means that some costs may be deductible in full immediately.

For many owners, amended returns can be filed to claim faster depreciation for property placed in service in an earlier year.


For more information on cost segregation, please contact Stephen Kirkland, CPA at (803) 791-7472 or Gregory Parsons, MS, PE, CBO at (803) 466-2466.