New Jersey has some of the highest corporate and pass-through income tax rates in the nation. Average property values are also relatively high.
Operating in such an environment requires superior tax and financial planning to accelerate portfolio growth. We believe that leveraging cost segregation in New Jersey is one of the best ways to unlock capital to scale your real estate portfolio faster.
This post explores how cost segregation works in New Jersey and how to find specialists to help you implement it.
Why Cost Segregation Matters in New Jersey
Cost segregation allows you to reclassify property components into shorter-lived assets. Instead of allocating your entire cost basis over 27.5 or 39 years, you can depreciate a significant portion over five, seven, and fifteen years.
The strategy gives you bigger deductions in the initial years of property ownership, enabling you to unlock liquidity without relying solely on expensive loans.
Here’s why it matters in New Jersey:
- New Jersey’s high tax exposure: Cost segregation works best when you have a high tax liability to offset. The combination of federal and high New Jersey taxes amplifies the benefits of accelerating depreciation. You’ll keep more of your money instead of giving it to the government.
- Elaborately equipped building stock: The average New Jersey property has significant five-, seven-, and fifteen-year property components that can be accelerated for depreciation. Generally, you can turn 20 to 40% of your property cost into immediate tax savings.
More importantly, doing cost segregation in New Jersey helps you get better portfolio returns over time.
Because of the time value of money, a dollar reinvested today is worth more than a dollar 27 or 39 years later. By frontloading depreciation and reinvesting the tax savings now, you get a longer runway to compound your money.
New Jersey Property Types That Qualify for Cost Segregation
The following New Jersey property types qualify for cost segregation:
- Office buildings
- Industrial buildings
- Warehousing facilities
- Retail and shopping centers
- Short-term (or vacation) rentals
- Multifamily units and apartment complexes
Generally, any building with significant Personal Property (appliances, furniture, etc.) and Site Improvements (pavings, pools, etc.) qualifies for cost segregation.
If your property has a cost basis exceeding $300,000 (excluding land), we believe you’ll benefit from accelerating the depreciation of these components.
Who Should Consider Cost Segregation in New Jersey?
You should consider cost segregation when you have taxable income you want to offset.
You’re a great candidate for cost segregation if you fall in any of the following categories:
- Newly acquired/placed-in-service property: By frontloading depreciation immediately on such a property, you capture tax savings that can be reinvested and compounded over the property’s entire lifecycle.
- Recently renovated property: Property rehabilitation typically adds significantly shorter-lived assets that can be depreciated faster. Further, cost segregation can give you the data to leverage the Partial Asset Disposition (PAD) election confidently.
- Long-term property holdings: A long-term investment strategy helps you maximize the benefits of accelerated depreciation. You’ll avoid common drawbacks like depreciation recapture.
That said, you can do cost segregation on properties placed in service in prior years. In that case, you’ll do a lookback study to claim any depreciation deductions you may have missed.
Use IRS Form 3115 to facilitate the change in strategy without amending prior tax returns.
Cost Segregation Process for New Jersey Properties
The IRS does not mandate a specific way to do cost segregation in New Jersey or any other state. However, in its Cost Segregation Audit Technique Guide (ATG), it explicitly states that a study done by an engineer is more reliable than one done by someone without a construction or engineering background.
Therefore, at Seneca Cost Segregation, we exclusively do engineering-based cost segregation studies.
Here’s how a study done by our experienced team of engineers will unfold:
Preliminary Analysis and Documentation Gathering
Do you want to know if cost segregation makes sense for your property before committing to a study? You can request a preliminary analysis of your property to get a free proposal with an estimate of your potential tax savings.
When you’re ready to proceed, we’ll request documents to support an engineering-based study. Generally, we require proof of ownership, purchase documents, as well as construction and renovation blueprints and invoices.
Property Inspection and Engineering Analysis
Depending on the property and timing considerations, we’ll conduct either a virtual or on-site property inspection.
Our team will identify property components and put them into the appropriate asset classes. We’ll then use industry best practices and engineering costing techniques to allocate and reconcile costs.
Report Preparation and Implementation Support
We’ll put together a comprehensive report detailing our methodology and findings. Your CPA can use the report to prepare your taxes.
Additionally, if you or your CPA requires help implementing our findings, we’ll be available post-study to provide the support you need. While our studies are unlikely to trigger an audit, every study we do is backed by our Seneca AuditDefense guarantee.
Ready to see how much you can save with an IRS-compliant study done by our experienced team of engineers?
Request a free proposal today, and we’ll send you a savings estimate.
Tax Advantages of Cost Segregation in New Jersey
The tax advantages of cost segregation stem from the fact that it allows you to supercharge depreciation, which is the most powerful tax deduction. It’s powerful because you can increase the deduction without increasing your “actual” expenses.
Consider this: most deductions, like management fees, involve money leaving your pocket. However, depreciation allows you to reduce your tax bill without a dollar leaving your account.
Specifically, cost segregation has the following key tax benefits:
- It allows you to get better returns on tax savings: If you are to reinvest tax savings from depreciation deductions, it makes sense to reinvest them now instead of 27 years later. Cost segregation makes this possible by pulling forward the depreciation of a significant portion of your property.
- It allows you to qualify for bonus depreciation: Assets with recovery periods of 20 years or less qualify for bonus depreciation. Therefore, the five-, seven-, and fifteen-year assets cost segregation identifies qualify.
Bonus depreciation is a powerful tax incentive allowing you to deduct up to 100% of the cost of eligible assets in the first year. For example, if you do a cost segregation study and find that $90,000 of the cost basis is shorter-lived assets, you can write off the entire amount in year one.
However, because New Jersey decouples from federal bonus depreciation rules, you’ll only do this at the federal level.
Here’s how:
- Federal tax treatment: Claim up to 100% bonus depreciation at the federal level. The rate depends on the year you placed the property in service.
- New Jersey tax treatment: Add back the deduction above to your state tax returns. You’ll then depreciate the eligible assets as if bonus depreciation did not exist, using standard MACRS (five, seven, and fifteen years).
The above tax treatments mean you’ll maintain separate depreciation schedules for federal and state taxes. Your CPA can help you implement this.
What to Look for in a Cost Segregation Firm in New Jersey
While cost segregation is one of the most effective real estate tax strategies you can employ in New Jersey, it’s only as strong a strategy as the firm backing it.
You need a firm that can bridge the gap between IRS guidelines and the need to maximize tax deductions.
Below are the considerations to have in mind when looking for such a partner:
- Engineering-based methodology: According to the IRS Cost Segregation ATG, engineering-based studies are the most reliable. Rely only on a firm with a team of engineers that has consistently produced defensible studies.
- Post-study support: It’s vital to ascertain the level of support the firm guarantees. Will it be available post-study to help you and your CPA implement their findings? Also, in the event of an audit, will it be available to defend its cost segregation report?
Additionally, you want to work with a firm with sufficient industry experience. For instance, our engineers have performed over 10,200 studies nationwide.
Frequently Asked Questions (FAQs)
Let’s answer some common questions about cost segregation in New Jersey:
What Are the Risks of Not Conducting a Cost Segregation Study?
Not conducting a cost segregation study is technically wrong. You’ll force 5/7/15-year assets into 27.5/39-year recovery periods, which is quite inefficient.
The most significant risk is that you’ll fall behind, as some of your competitors in New Jersey are already leveraging cost segregation to grow their portfolio faster.
Can Cost Segregation Help with Business Expansion Planning?
Yes, cost segregation and bonus depreciation yield significant tax savings and can help you unlock capital to expand your real estate business.
Further, it’s ideal for planning because it is a tax strategy you can execute all year round. You don’t have to wait until filing time to lock in massive tax savings.
What Records Should NJ Owners Maintain After the Study?
Keep the full report of the engineering-based study and copies of the supporting documentation.
Additionally, because New Jersey decouples from federal bonus depreciation rules, keep a record of your reconciliation of the two depreciation schedules you’ll be using.
Conclusion
Cost segregation isn’t just a tax strategy — it’s a capital strategy. When depreciation is properly accelerated, it frees up cash for reinvestment in new acquisitions, renovations, or debt reduction, helping you scale faster without taking on unnecessary risk.
If you own income-producing real estate in New Jersey and are depreciating your property over 27.5 or 39 years, there’s a strong chance you’re leaving meaningful tax savings on the table. An engineering-based cost segregation study lets you unlock that value while remaining fully compliant with IRS guidelines.
At Seneca Cost Segregation, we’ve consistently helped investors turn 20 – 40% of their property costs into immediate tax savings. With over 12 years of experience and 1000+ properties assessed, we conduct in-depth studies to reclassify building components for faster tax write-offs.
Contact us today to optimize federal taxes and find the capital to invest in your next property faster.
