Landlord Tax Slashing Techniques - Only for the Rich?

When it comes to tax strategies, many commercial and residential landlords overlook one very helpful strategy: cost segregation. 

Cost segregation breaks down the components of a property and assigns depreciation timelines to each part. Some parts, like flooring, furnishings, plumbing and cabinetry, depreciate faster than other elements of the property. Cost segregation allow the owner to take larger tax deductions for these items over a shorter timeframe, rather than spread out over the standard period of 39 years for commercial properties and 27.5 years for residential rental properties. Other items that can benefit from this strategy include appliances, partition walls, millwork, light fixtures, shelving, landscaping, and wall and window coverings.

Many property owners shy away from this strategy as the accounting fees required to comply with these deductions can be cost-prohibitive. In fact, properties valued at $1 million or more stand to realize a return on this investment, according to a Zurich white paper, "Cost segregation strategies for commercial property". The paper cited one $18 million apartment complex which realized a five-year tax savings of $1.6 million from this strategy, and a $5.2 million office building which experienced five-year tax savings of $626,000. 

Not surprisingly, properties like resorts, restaurants and assisted living facilities tend to benefit the most from cost segregation since they contain a higher portion of qualifying features. 

Needless to say, the IRS doesn't love this strategy, and in March ruled against the owner of a large apartment complex which tried to defend its use of cost segregation. The owner, AmeriSouth, lost its case. One tax preparer with the accounting firm WithumSmith+Brown called the move a "game changer" for cost segregation. "Yesterday, the tax court dealt a blow to the cost segregation movement," wrote Tony Nitti, a partner in the firm, on his blog, Double Taxation