Cost Segregation: A Boon for the Taxpayers!

Nobody likes to pay taxes. So, everybody looks for different ways of tax deduction. No wonder, business deductions act as a soothing factor for all the taxpayers.

"Computing-business taxes" is a 3-step process, calculating total revenue, then deducting the tax deductions and finally paying the tax on remaining amount.

Cost segregation is a depreciation technique for investors in real estate which can help us save quite a lot in federal income tax this year. No kidding, you can actually enhance the depreciation to slash the income tax rates from 35% to just 15%! This can help us avoid paying tax on our investment until the building is sold.

Initially, the increased depreciation is compensated for the earnings from the property. When this advantage runs out, you can sell the property and pay the taxes on the capital gains at the rate of 15 percent. Ultimately, you end up deferring the income taxes for five or may be up to 15 plus years.
Along with the above factor you can also consider the advantage of factor called cost segregation. This tax technique can save a considerable amount in federal income taxes. Currently this is not used so commonly but the American Institute of Certified Public Accountants' National Journal of Accountancy has published many articles to support the cost segregation.
Cost segregation recognizes appropriate mechanism and the value and correct time line is set for depreciation. This depreciation can be extended over a period of as long as 39 years in some typical situations. But cost segregation is generally applied in parts of the property in 5, 7 and 15 year increments. Eventually, the income applicable for the federal taxes is reduced as a result of this accelerated depreciation.

Usually, the depreciation schedules are divided as land and long-life property. Long-life commercial property depreciates over 39 years and over 27.5 years for apartments. Cost segregation analysis can apportion 20 to 40% or even more of the improvement basis to short-life categories.
Owners of high income pay 35% federal tax rate on their normal income and on capital gains the rate is 15%. The technique to report the gain on a sale allocates major part of the gain to capital gains and for this the tax rate is 15%.

The cost segregation analysis decreases the amount of long life property, thus this is brought back to 25% by apportioning more of the basis to the 5, 7 and 15 year property. If the cost segregation is used from beginning till a gain on the property is achieved, it can cut down the tax rate to a minimum of 15% for most of the investors. The C corporations are the ones exempted from this and they need to pay the same tax rate for both capital gains and ordinary income.

In an ideal tax planning process, you need to consider all legal deductions and make sure you pay only the fair share of taxes.

It is absolutely legitimate to plan your taxes in such a way that you pay only the minimum required. There are many techniques suggested by tax consultants and cast segregation is one of them. This is not used by many investors because it is not widely known. However you can make tangible gains by employing this technique. How it Works? Chintamani Abhyankar explains.

Chintamani Abhyankar, is a well known expert in the field of finance and taxation for last 25 years. He has written many books explaining inside secrets of the magic world of personal finance. His famous eBook Stop donating your money to IRS which is now running in its second edition, provides intricate knowledge and valuable tips on personal finance and income tax.