Non-residential real property is deductible over 39-years, so by the time most doctors are in the financial position to consider purchasing their own real estate, they will likely not be able to harvest the full tax benefits of ownership during their working careers.

One way to capture these tax benefits sooner is to have a cost segregation study performed on the building. The goal of a cost segregation study is to identify certain elements of the building that can be assigned to classes of assets that may be deducted over a shorter period of time. Dental equipment and land improvements, for example, may be deducted over 5 years and 15 years, respectively.

Therefore, a cost segregation study does not identify new deductions; instead, it accelerates those deductions so that the doctor may more quickly realize the tax benefits of her investment.

The $118,000 Tax Refund!

A doctor recently invested roughly $955,000 in the construction of his dental office. The results yielded by a cost segregation study allowed the doctor to assign 20% of his investment to dental equipment and another 21% to land improvements.

Absent this study, the entirety of the investment would have defaulted to non-residential real property, which, again, is deductible over 39 years. Here is a summary of the results with and without the study and the first year tax savings:

Why is there such a large disparity in the first year? Not only do we have the shortened depreciable lives working in the doctor’s favor, but the doctor also benefits from the availability of Section 179 business expensing and bonus depreciation on the 5-year and 15-year property. So the doctor gets a first year deduction for the entirety of the costs assigned to these categories.

Incidentally, in this example, the estimated $118,000 in tax savings wiped out nearly all of the doctor’s tax liability for the year!

The Bottom Line

The greater the investment, the greater the potential first year tax savings from a cost segregation study. But that does not mean you have to spend $1 million on your building to justify a study. Firms that perform these studies will provide a price of the study and and estimated tax savings before you commit. If the estimated tax savings is a healthy multiple of the cost of the study, then the cost is easily justified.