Cost Segregation For Short Term Rental Owners
As a short-term rental property owner, maximizing your tax savings is essential for the success of your investment. One effective strategy to achieve this is through cost segregation.
Cost segregation is a tax-saving technique that allows you to accelerate the depreciation of certain assets in your property. Traditionally, real estate is depreciated over 27.5 or 39 years, while personal property is depreciated over 5 to 7 years and land improvements receiving a 15-year treatment. Cost segregation allows you to reclassify certain components of your property, such as appliances, fixtures, and special use electrical & plumbing as personal property, enabling you to depreciate them over a shorter timeframe. This results in larger tax deductions in the early years of ownership, reducing your taxable income and ultimately lowering your tax burden.
The beauty of cost segregation is its versatility, it can unlock tax savings for a diverse range of short-term rental properties, including:
Urban Apartments
Studio apartments, lofts, and trendy condos catering to business travelers or weekend getaways can benefit from cost segregation on appliances, furniture, smart home systems, and even rooftop amenities like grills and hot tubs.
Shared Accommodations
Hostels, co-living spaces, and even shared vacation homes can leverage cost segregation for common areas like kitchens, bathrooms, laundry facilities, and entertainment zones.
Glamping and Unique Stays
Eco-friendly pods, tiny homes, yurts, or even treehouses can benefit from reclassifying unique fixtures, furnishings, and outdoor amenities like decks, fire pits, and hot tubs.
Vacation Rentals with Special Features
Properties with pools, hot tubs, saunas, game rooms, or fitness centers can see significant tax savings by separating these amenities from the main structure and depreciating them over shorter periods.
Destination Rentals
Beachfront houses, ski chalets, or cabins in national parks can capitalize on cost segregation for features like boat docks, ski equipment rentals, or outdoor gear provided to guests.
Remember, the key is identifying assets with shorter lifespans than the building itself. With a variety of short-term rental options available, cost segregation can be a valuable tax-saving strategy for all!
Benefits of Cost Segregation for Short-Term Rentals
- Increased tax deductions: By reclassifying assets as personal property and land improvements, you can claim larger depreciation deductions in the early years, significantly reducing your taxable income.
- Lower tax liability: With lower taxable income, you’ll pay less in federal and state income taxes.
- Improved cash flow: The tax savings from cost segregation can translate to improved cash flow, which you can reinvest into your property or use for other financial goals.
Navigating IRS Cost Segregation Landscape
It’s important to remember that the IRS has guidelines for cost segregation studies. To ensure compliance and maximize your tax benefits, it’s advisable to work with a qualified cost segregation professional. They can conduct a thorough study of your property, accurately classify your assets, and provide a detailed report that meets IRS requirements.
Conclusion
Cost segregation is a powerful tool that can help short-term rental property owners significantly reduce their tax burden and improve their cash flow.
Here are some additional tips for short-term rental property owners considering cost segregation:
- Start early: The sooner you conduct a cost segregation study, the sooner you can start claiming tax benefits
- Keep good records: Maintain detailed records of all your property expenses, including receipts and invoices
- Work with a qualified professional: A qualified cost segregation professional can help you navigate the complexities of the process and ensure compliance with IRS guidelines
By following these tips, you can make the most of cost segregation for your short-term rental and enjoy the financial benefits it offers.
Article Written By Patrick Esteban, Source Advisors.
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1 comment on “A Powerful Tool For Rental Property Owners To Maximize Tax Savings Through Cost Segregation Studies”
https://www.irs.gov/newsroom/irs-warns-taxpayers-of-dirty-dozen-tax-scams-for-2022, https://www.irs.gov/pub/irs-pdf/p5653.pdf, In a chief counsel advisory (CCA) IRS warned taxpayers that an “accurate cost segregation study may not be based on noncontemporaneous records, reconstructed data or taxpayers’ estimates or assumptions that have no supporting records” (CCA 199921045)