For real estate investors and business owners, making money is only part of the equation. The other part is understanding how to keep more of what you earn through smart, proactive, and compliant tax planning.
On the Capital Gains Tax Solutions Podcast, Brett Swarts sat down with Joseph Viery of U.S. Tax Advisory Group to discuss one of the most powerful tax strategies available to real estate investors: cost segregation.
While cost segregation can sound complicated, the basic idea is surprisingly simple. Instead of automatically depreciating an entire residential investment property over 27.5 years or a commercial property over 39 years, a cost segregation study identifies components of the property that may qualify for accelerated depreciation.
The potential result? Larger deductions earlier in the investment cycle and more capital available to reinvest.
What Is Cost Segregation?
When you purchase an investment property, the IRS generally allows you to depreciate the building over time. Land itself is not depreciable, but the building and certain components can be.
A cost segregation study takes a closer look at those components.
Rather than treating the entire building as one asset, specialists analyze items within the property to determine whether certain components can be classified into shorter depreciation periods.
Joseph emphasized that compliance matters. His approach is centered around following the IRS cost segregation Audit Technique Guide and completing studies according to established guidelines.
That distinction is important. Effective tax planning isn’t about finding loopholes or taking unnecessary risks. It’s about understanding what the tax code allows and working with experienced professionals to apply those rules correctly.
Cost Segregation Can Go Beyond the Initial Purchase
One particularly interesting part of Brett and Joseph’s conversation involved value add real estate.
Imagine purchasing an apartment building and then renovating the units. You replace flooring, countertops, roofs, fixtures, and other components.
Those old components may still have value embedded in the property’s original depreciation schedule.
Joseph explained that when an existing component is removed and replaced, investors may be able to identify the remaining value associated with the disposed asset. A cost segregation study can help establish the value of those components.
Then there’s another potential opportunity: the improvements themselves.
If an investor spends significant capital renovating a property, another study may identify portions of those improvements that qualify for accelerated depreciation.
For value-added real estate investors, this creates multiple opportunities to evaluate the tax efficiency of a project, not just when purchasing the property, but also while improving it.
Think About “Tax Flow,” Not Just Cash Flow
Real estate investors traditionally focus heavily on cash flow.
How much rent comes in? What are the operating expenses? What’s the debt service? What’s left at the end of the month?
Those questions matter, but Brett introduced another concept during the conversation: tax flow.
A property producing attractive cash flow may become even more valuable when you consider depreciation and other tax benefits. Conversely, a profitable investment without a proactive tax strategy could create a larger tax liability than expected.
That’s why sophisticated wealth planning often requires multiple professionals working together.
Your CPA understands your overall tax picture. A cost segregation specialist analyzes depreciation opportunities. Your financial and legal professionals evaluate how those strategies interact with your broader wealth plan.
Rather than expecting one advisor to know everything, build a team of specialists who understand how their pieces fit together.
When Does Cost Segregation Make Sense?
Cost segregation isn’t necessarily appropriate for every property or every investor.
For example, Joseph explained that his firm offers detailed engineering studies as well as modeling studies for certain smaller properties. That can potentially make cost segregation accessible to investors who own smaller rental properties, not just multimillion dollar apartment communities.
Holding period also matters.
Because depreciation recapture may come into play when a property is sold, Joseph suggested that investors carefully evaluate the economics when they expect to sell quickly. In the podcast, he described roughly a two year holding period as a general benchmark his team considers, while noting that the economics of each investment can change the analysis.
This is another reason to involve your CPA and tax professionals before implementing a strategy.
Build Your Tax Strategy Before You Need It
Perhaps the biggest lesson isn’t simply that investors should use cost segregation.
It’s that proactive planning creates options.
If you’re selling highly appreciated real estate, a business, cryptocurrency, or another asset, waiting until after the transaction closes can significantly limit your choices.
Strategies such as cost segregation and the Deferred Sales Trust may address different parts of an investor’s financial picture. When coordinated with qualified tax, legal, and investment professionals, these strategies can potentially help investors defer taxes, reposition capital, diversify investments, and create new opportunities for building wealth.
The goal isn’t simply to earn more.
It’s to intentionally structure your wealth so more of your capital remains available to invest, compound, support your family, and make an impact.
If you’re considering the sale of a highly appreciated asset and want to explore your capital gains tax deferral options, visit Capital Gains Tax Solutions and schedule a consultation to learn whether a Deferred Sales Trust may fit your situation.