In the world of multifamily real estate, cost segregation is a game-changer for investors. This strategy accelerates depreciation on certain property components, giving property owners the ability to reduce taxable income and improve cash flow. If you're looking to maximize your returns in 2025, understanding how cost segregation works and how it can benefit your investment portfolio is key.
We currently have an open investment opportunity where we will be running a cost segregation study for the year 2025. If you would like more info on how you can reduce your taxable income through this strategy, please click here to learn more about Lake Shore Park!
What Is Cost Segregation?
Cost segregation is a tax strategy that identifies and reclassifies the components of a property into categories that can be depreciated more quickly. This allows real estate investors to take larger depreciation deductions in the early years of ownership. Normally, the IRS requires that multifamily properties be depreciated over 27.5 years, but with cost segregation, items like appliances, carpets, and certain fixtures might be depreciated over as little as 5 or 15 years. This creates the opportunity for significant tax savings right when you need it most.
Why It’s Essential
With tax laws constantly evolving, 2025 could be a pivotal year for real estate investors. While we don’t know exactly how tax laws will shift, there’s a growing sense that changes are coming. Taking advantage of cost segregation now could give you a critical edge by lowering your tax liabilities and increasing your cash flow in the short term. Additionally, the rise in multifamily property demand means that properties purchased now could benefit significantly from this strategy, boosting both your tax benefits and your return on investment.
How It Works
The process of cost segregation involves working with engineers and tax professionals to perform a detailed study of your property. They break down your property into components—such as land improvements, personal property, and building systems—that qualify for accelerated depreciation. This allows for a more aggressive depreciation schedule than the standard 27.5 years. The results? Larger upfront deductions that reduce your taxable income and improve your cash flow in the early years of ownership, a benefit that can be reinvested in other real estate ventures.
Imagine purchasing a multifamily property for $3 million. With traditional depreciation, you’d typically be able to deduct about $109,000 annually over the next 27.5 years. However, by utilizing cost segregation, you could reallocate up to $500,000 of the purchase price to shorter depreciation schedules, potentially increasing your deductions in the first year to $250,000 or more. This can substantially reduce your immediate tax burden, creating significant savings right when you need them.
Benefits Beyond Tax Savings
While the primary benefit of cost segregation is the immediate tax savings, there are other compelling reasons to incorporate this strategy into your investment portfolio. Increased cash flow, thanks to the reduction in taxable income, gives you more capital to reinvest into additional properties or improvements. This additional capital can also be used to refinance your properties at more favorable terms, further improving the profitability of your investments.
Closing Thoughts
Cost segregation is a proven strategy for real estate investors, particularly those focused on multifamily properties. As we enter 2025, it’s more important than ever to understand how this strategy can impact your investment returns and tax liabilities. If you haven’t already utilized cost segregation for your properties, now is the time to consider it. Work with a qualified team of tax professionals and engineers to ensure you’re maximizing your deductions and setting yourself up for success.
Thank you for reading this month's blog post. As always, if there is a particular topic you would like to learn about and see published, reach out to our team via email at investors@hammerandhampel.com
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