Oregon has no sales tax. That’s why it leans heavily on income taxes, with the top marginal state income tax rate at 9.9%.
There’s a silver lining, though. The state generally conforms to federal bonus depreciation rules. It means you can maximize the benefits of cost segregation in Oregon by taking significant upfront deductions at both the federal and state levels.
In this post, we’ll explore how cost segregation works in Oregon, the relevant IRS compliance considerations, and how to choose a good specialist to help you conduct a study.
Why Cost Segregation Matters in Oregon
Cost segregation matters because it helps you front-load depreciation, allowing for larger deductions in the initial years of property ownership.
In traditional straight-line depreciation, you allocate the entire depreciable basis of a property linearly over 27.5 years (residential) or 39 years (commercial). The approach is inefficient because there are many property components with shorter useful lives.
Cost segregation solves for this inefficiency by:
- Identifying and classifying property components based on their useful lives (5/7, 15, and 27.5/39 years)
- Allocating costs to these property components (and reconciling with the overall cost basis)
- Subjecting the property components to depreciation schedules consistent with their actual useful lives
By doing so, cost segregation accelerates your depreciation deductions. Every additional dollar in deductions helps you lower your federal and Oregon tax liabilities.
Eligible Property Types for Cost Segregation in Oregon
The following types of Oregon properties are generally eligible for cost segregation:
- Office buildings
- Multi-family units
- Short-term rentals
- Apartment complexes
- Industrial and manufacturing facilities with heavy fixtures
When you do cost segregation on any of these eligible properties, the two asset categories that benefit from accelerated depreciation are Personal Property and Site Improvements.
- Personal property includes appliances, furniture, window treatments, carpeting, decorative lighting, cable/data lines, accent walls, etc.
- Site improvements include parking lots, driveways, sidewalks, non-living landscaping, drainage systems, swimming pools, patios, gazebos, etc.
The classification adds a layer of complexity in Oregon because the state has a tax called the Business Personal Property Tax, which is charged at the county level. The rates vary by neighborhood.
Consequently, when you do cost segregation and classify assets as “personal property,” you may have to:
- Add the movable assets classified as personal property in your county tax returns if they were not in your previous returns.
- Pay the property tax on those assets.
Therefore, you must weigh the net benefit of the cost segregation tax break against the incremental personal property tax liability.
At Seneca Cost Segregation, we’ve found that when you combine cost segregation and bonus depreciation, cost segregation is viable for many types of Oregon properties with a depreciable basis exceeding $300,000. The higher the depreciable basis, the higher the net benefit.
Oregon Tax Advantages
Doing cost segregation in Oregon has the following tax benefits:
- It accelerates depreciation: Instead of spreading depreciation linearly over decades, cost segregation allows you to accelerate the depreciation of the shorter-lived assets in your property. The result is larger deductions in the initial years of property ownership.
- It helps you qualify for bonus depreciation: Bonus depreciation is a tax incentive that allows you to deduct up to 100% of the cost of a qualifying asset in its first year. Personal property and site improvements qualify for bonus depreciation.
We mentioned earlier that combining cost segregation and bonus depreciation makes the tax strategy viable in Oregon.
Our argument is based on the massive initial tax savings and the compounding power of the time value of money. A dollar reinvested today is worth significantly more than a dollar reinvested 27 years later.
For context, with bonus depreciation, our clients average a first-year deduction of $171,243. If you were to allocate this amount over 27.5 years, you’d claim approximately $6,227 annually.
Now, for illustration purposes, let’s assume there’s no incremental Business Personal Property Tax. Let’s also assume that property prices increase 5.2% yearly, and you reinvest the equivalent of the depreciation deductions.
- If you reinvest the entire $171,243 now, you’ll have $690,243 at the end of the recovery period (27.5 years).
- If you reinvest $6,227 yearly for the entire recovery period, you’ll end up with $362,985.
$690,243 – $362,985 = $327,258.
Therefore, getting the deduction upfront and reinvesting it immediately puts you $327,258 ahead.
Cost Segregation Study Process in Oregon
The IRS does not mandate a specific method for cost segregation. However, in its Cost Segregation Audit Technique Guide, it states that a study done by an engineer is more reliable than one done by someone without an engineering or construction background.
As such, we exclusively do engineering-based cost segregation studies.
Here’s what a study conducted by our experienced team of engineers looks like:
Feasibility Analysis and Documentation Gathering
Contact us for a preliminary analysis of your property to get an estimate of your potential tax savings. We’ll look into the property and send a proposal.
If you decide to proceed with the study, we’ll require you to provide documentation to support it. In addition to documents proving ownership, we’ll also require purchase and construction documents.
Property Inspection and Engineering Analysis
Depending on the property, project timelines, and your requirements, we’ll do either a virtual or on-site inspection of your property.
Our engineers will identify the components of your property, classify them, and allocate costs using industry best practices and engineering costing techniques. Our classification and costing methodologies strictly follow IRS guidelines.
Report Preparation and Implementation Support
We’ll prepare a report detailing our asset classifications and cost allocations. We’ll also describe the methodologies we used to arrive at these decisions.
Your CPA will use the report to prepare your taxes.
Our services include post-study support. If your CPA requires clarification or assistance in implementing our findings, we’ll be available to provide the necessary support.
Further, every study we do is backed by our Seneca AuditDefense guarantee. In the unlikely event of an audit, we’ll help you defend the report.
Free Cost Segregation Calculator for Oregon Property Owners
As a savvy real estate investor, you should always be running the numbers. If a cost segregation study yields over $170,000 in federal tax savings in the first year, is it worth it?
We’ve made it easy to determine how much you stand to save in taxes with a cost segregation study.
Use our cost segregation tax calculator to estimate your potential tax savings on the properties you currently hold. You can use the calculator to compare cost segregation deductions with those under the standard depreciation method.
IRS Rules and Compliance Considerations
When you work only with the best cost segregation firms, you’ll significantly reduce the risk of running afoul of IRS rules.
That said, here are some of the considerations you should keep in mind.
- Placed-in-service dates: The bonus depreciation rate depends on the year you placed a property in service. It isn’t always the date of purchase or construction completion. It is the date the property is ready and available for its assigned function.
- Changing accounting methods: If you do a study on a property placed in service in prior years, you can catch up on the depreciation you may have missed by applying for a change in accounting method using IRS Form 3115.
- Providing thorough documentation: Good documentation ensures audit readiness. You want to back every component reclassification and cost allocation with relevant supporting documents.
How to Choose the Right Cost Segregation Firm in Oregon
Given how working with a good cost segregation firm affects IRS compliance and your ability to maximize tax savings, how should you go about choosing one?
These are the essential factors you must not compromise on:
- Engineering-based methodology: The gold standard for cost segregation is engineering-based methodology. The IRS prefers studies conducted by experienced engineers.
- Industry experience: Like most professional services, cost segregation benefits from extensive real-world sector knowledge. Industry knowledge can translate directly into value for you through higher tax savings and lower audit risk. Our engineers, for instance, have completed over 10,200 studies nationwide.
- Audit defense: While a properly conducted study is unlikely to trigger an audit, it is advisable to hire a firm that can commit to defending its cost segregation report in the event of an audit.
Frequently Asked Questions (FAQs)
Below are answers to some of the common questions we receive about doing cost segregation in Oregon:
Can I Use Cost Segregation For Short-Term Rental Properties in Oregon?
Yes, you should consider cost segregation on short-term rentals (STRs).
The goal with an STR in this case would be to bypass Passive Activity Loss rules by qualifying as a material participant. If you qualify, you may use a paper loss created by claiming short-term rental bonus depreciation to offset all income, including your active business income or W-2.
Can Non-Profit Organizations Use Cost Segregation?
Most non-profits are exempt from federal and state taxes. Since cost segregation is a strategy to reduce tax liabilities, it has little utility for the typical non-profit.
How Do I Determine If My Property is Too Old for a Study?
Cost segregation makes sense when the potential tax savings significantly outweigh the cost of the study. You can calculate your potential tax savings using our Cost Segregation Calculator.
What Kind of Documentation is Needed for a Cost Segregation Study?
You’ll typically need the following documents:
- Construction blueprints and drawings
- Renovation blueprints and invoices
- Inspection and appraisal reports
- Construction invoices
- Title documents
- Change orders
Conclusion
For many real estate businesses in Oregon, the significant upfront tax break of cost segregation and bonus depreciation can be the cash boost that finally unlocks rapid portfolio growth.
Moreover, if you are consistently putting new properties in service, you can build a snowball of depreciation that carries forward each year, effectively wiping out your taxable income so you don’t have to worry about federal taxes.
To effectively deploy this tax strategy, you need an experienced partner like Seneca Cost Segregation by your side. Working with us also gives you access to cost-segregation-minded professionals in our network (CPAs, advisors, etc.), should you need them.
Contact us today to lower your tax bill with an IRS-compliant cost segregation study. We can help you turn 20 – 40% of your property cost into immediate tax savings.
