For the sixth consecutive year, MoveBuddha ranked South Carolina as the most popular state to move to. The high demand, coupled with other factors, is pushing up property prices in major cities.
In fact, Realtor.com reports that Charleston was one of the top three cities with the most significant increase in home values over the past few years.
If you are looking to grow your portfolio in such a dynamic market, you need ways to unlock additional liquidity. We believe doing cost segregation in South Carolina is the best way to mobilize such cash, as it allows you to turn 20 – 40% of the costs of the properties you currently hold into immediate tax savings.
In this post, we’ll explore how cost segregation works in South Carolina, how to calculate your potential tax savings, and how to choose the right firm to help you conduct a study.
What is Cost Segregation?
Cost segregation is an IRS-approved tax strategy that allows you to reclassify property components and subject a significant portion to shorter depreciation schedules, effectively frontloading your depreciation.
In standard straight-line depreciation, you allocate the entire cost basis of a property linearly over 27.5 years (residential) or 39 years (commercial). Many investors find the approach suboptimal, as several property components have shorter useful lives.
To solve this problem, investors use cost segregation to put depreciable property components into the following buckets:
- Personal property: 5- or 7-year recover period
- Site/land improvements: 15-year recovery period
- Real property (the core building structure): 27.5/39-year recovery period
The exercise significantly accelerates depreciation, resulting in larger deductions in the initial years of property ownership.
Why Cost Segregation Matters in South Carolina
The most significant benefit of cost segregation for South Carolina investors is the immediate increase in liquidity that results from front-loading depreciation.
It gives you the flexibility to snap up good deals as soon as they become available. Additionally, if you’re reinvesting your tax savings in a growing market like South Carolina, it makes sense to receive those tax savings early, allowing you to have a longer runway to compound the growth.
That said, you should strongly consider cost segregation because:
- It is the correct method: Ideally, you should depreciate all your property components according to their useful lives. However, if you do nothing, the IRS will gladly depreciate your entire property over 27.5 or 39 years, as it yields more taxes in the early years.
- It allows you to qualify for bonus depreciation: Bonus depreciation is a tax incentive that enables you to deduct up to 100% of the cost of a qualifying asset in its first year. Personal property and site/land improvements qualify for bonus depreciation.
The Tax Cuts and Jobs Act (TCJA) of 2017 initially allowed for 100% bonus depreciation up to 2022, phasing it out as follows:
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027: 0%
Given the success of the legislation, there was strong interest in cementing its key provisions. The One Big Beautiful Bill Act did precisely that, permanently restoring bonus depreciation to 100% for properties placed in service after January 19, 2025.
Property Types That Qualify in South Carolina
We believe properties with a cost basis exceeding $300,000 (excluding land) will benefit from cost segregation.
Generally, the following property types in South Carolina qualify:
- Office buildings: The typical office building in South Carolina qualifies. Moreover, where there are leasehold improvements/tenant buildouts, the exercise often includes adding many shorter-lived assets.
- Multifamily units: South Carolina boasts a strong market for multifamily units, from duplexes to apartment buildings. They typically contain many shorter-lived assets.
- Short-term rentals (STRs): Charleston, Hilton Head, and Myrtle Beach have several STRs with elaborate personal property and site improvements to enhance guest experience. Cost segregation for short-term rentals can help you depreciate these assets faster.
- Manufacturing and warehousing facilities: Such facilities in the Upstate may have heavy fixtures (e.g., electrical fixtures) whose depreciation can be accelerated.
What Tax Savings Look Like For South Carolina Buildings
We mentioned earlier that one of the benefits of performing a cost segregation study is that it allows you to qualify for bonus depreciation.
It’s crucial to note that South Carolina decouples from federal bonus depreciation rules. Therefore, the tax treatment is as follows:
- Federal treatment: You can deduct up to 100% of the cost of qualifying assets immediately. The applicable rate depends on the year the property is put into service.
- South Carolina treatment: You’ll add back the bonus depreciation above to your state income. You’ll then depreciate the assets in question over 5/7 or 15 years (standard MACRS) as if bonus depreciation did not exist.
As such, you still get to qualify for bonus depreciation at the federal level. At the state level, depreciating assets in 15 years or less is still better than spreading the cost over 27.5/39 years.
Let’s explore the federal-level impact with a cost segregation study example.
Cost Segregation Example with Bonus Depreciation (Federal-Level)
Assume you hold a residential property, which was placed in service in 2024, with the following details:
- Purchase: $1,000,000
- Improvements made: $50,000
- Land value: $150,000
- Cost basis: $900,000 (Purchase + Improvements – Land)
Traditionally, you’d allocate the $900,000 linearly over 27.5 years, resulting in a $32,727.27 deduction each year.
Cost segregation takes a different approach. Now, let’s assume that Seneca Cost Segregation conducted a study and found that 12% of the cost basis is personal property and 16% is site improvements. The remaining 72% is real property.
- 12% of $900,000 = $108,000
- 16% of $900,000 = $144,000
- 72% of $900,000 = $648,000
As per the phaseout schedule we discussed earlier, the personal property and site improvements qualify for 60% bonus depreciation because you placed the property in service in 2024.
- $108,000 x 60% = $64,800. The remaining 40% comes in over the next 5 years.
- $144,000 x 60% = $86,400. The remaining 40% comes in over the next 15 years.
- Real Property / 27.5 or 39 = $648,000 / 27.5 = $23,563.64 every year until Year 28
The total deduction in the first year = $64,800 + $86,400 + $23,563.64 = $174,763.64
Since you’d have gotten a $32,727.27 deduction with standard straight-line depreciation, the additional first-year depreciation is: $174,763.64 – $32,727.27 = $142,036.37.
You’ll get a tax deduction of $142,036.37 instead of $32,727.27. At a 37% federal tax rate, this puts over $52,000 of liquidity back into your business — capital you can immediately reinvest.
Clearly, the tax savings from doing a cost segregation study can be substantial. How much in taxes can you save with the properties you currently hold?
Use our free Cost Segregation Calculator to estimate your potential tax savings. It uses pre-built reclassification percentages based on years of cost segregation studies and data, as well as models we’ve built over time.
Steps to Conduct a Cost Segregation Study for SC Properties
While there are guidelines on what constitutes a quality cost segregation study, the IRS doesn’t mandate a particular methodology.
That said, the IRS Cost Segregation Audit Technique Guide states that a study conducted by an engineer is more reliable than one done by someone without a construction or engineering background.
As such, we only conduct engineering-based cost segregation studies. Our studies follow a three-step process that results in effective and defensible reports.
Let’s walk through the steps:
Feasibility Analysis and Document Collection
If you are still unsure whether your property is eligible for cost segregation, contact us, and we’ll conduct a preliminary analysis. We’ll send over a free proposal that will include an estimate of your potential tax savings.
When you are ready to proceed with an actual study, our team will require documentation to help us determine and support property classifications and cost allocations. You can provide ownership, purchase, construction, and renovation documents.
Property Inspection and Engineering Analysis
Depending on the property type, timing, and your preferences, we’ll either conduct a virtual or on-site inspection of your property.
Our engineering team will identify the various components of your property and classify them accordingly. Using industry best practices and engineering costing techniques, we’ll then allocate costs to them. The costs must reconcile with the overall cost basis.
Delivery of the Report and Implementation Support
We’ll prepare a detailed report covering our asset classifications and cost allocations. The report will include a description of the methodology as well as the rationale for these decisions.
Your CPA can then use the report to prepare your taxes. Should you or your CPA need help implementing our findings effectively, we’ll be available to provide the necessary support. Also, our services include an iron-clad audit defense guarantee, the Seneca AuditDefense.
Contact us today to benefit from our fully integrated cost segregation service. When you work with us, we can also connect you to cost-segregation-minded professionals in our network (CPAs, advisors, etc.), should you need them.
What to Look for in a South Carolina Cost Segregation Firm
While cost segregation is fully IRS-approved, you must work with the right firm to avoid exposing yourself to audit risk.
As such, we advise you to use the following criteria to evaluate potential candidates:
- Engineering-based methodology: The IRS considers studies done by professionals with construction and engineering experience as more credible. It makes sense to stick to the IRS gold standard.
- South Carolina knowledge: There are nuances in local tax treatments and construction specifications that only an extensively experienced firm will understand. Our experienced team of engineers has completed over 10,200 studies nationwide.
- Audit defense: A properly done study will likely withstand IRS scrutiny. However, in the unlikely event of an audit, the cost segregation firm should be ready to defend its report.
Common Challenges and How to Avoid Them
Like with most tax strategies, you must account for potential downsides. Fortunately, most of the common challenges that come with cost segregation can be easily managed if you have the right professionals by your side.
Here are two common issues and how to navigate them:
- Recapture tax: When you frontload depreciation and dispose of the property soon after, you’ll sell it at a price significantly higher than the book value, triggering recapture tax. Working with a good CPA, you can defer, minimize, or offset this tax using IRS-approved strategies, such as a Section 1031 exchange.
- Future cash flow planning: You must understand that cost segregation does not create a new deduction. You’ll get the deductions you’d have gotten anyway, but sooner. Therefore, the best use of the front-loaded deductions is to reinvest them so as to reduce the cash flow impact of lower deductions in the future.
Frequently Asked Questions (FAQs)
Below are answers to some of the commonly asked questions about cost segregation:
What’s the Minimum Property Value That Makes Sense for a Study?
Cost segregation makes sense when the resultant tax savings significantly outweigh the cost of the study. We recommend considering a study if your property has a depreciable basis exceeding $300,000.
Can a Study Still Provide Value Without Bonus Depreciation?
Yes, accelerating depreciation through cost segregation, without utilizing bonus depreciation, can yield significant tax savings.
That said, the One Big Beautiful Bill Act brought certainty about the fate of bonus depreciation. You can plan knowing that it has been permanently restored to 100% for properties placed in service after January 19, 2025.
What Happens If I Renovated Years Ago Without a Study?
In that case, you can do a look-back study to catch up on depreciation you may have missed. You’ll then apply for a change in accounting method using IRS Form 3115. You won’t have to amend previous tax returns.
Conclusion
In a growing property market like South Carolina, you cannot afford to keep postponing your investment decisions. Moreover, a dollar invested today is worth significantly more than a dollar 28 years later.
Now’s the time to use cost segregation to frontload depreciation so you can reinvest your deductions early. With an experienced firm like Seneca Cost Segregation by your side, you can do this in an IRS-compliant manner with minimal audit risk. We strictly follow the IRS Cost Segregation Audit Technique Guide.
Request a free proposal to see how much you can save in taxes with your current property. We consistently turn 20-40% of property costs into immediate tax savings.
