Depreciation is a powerful tax deduction. Think about the other deductions you typically claim, like mortgage interest and management fees. You incur the expense upfront and claim it as a deduction later.
With depreciation, you get it simply because you own a depreciable interest in a property. Luckily, Utah is very tax-friendly as regards depreciation. The state fully conforms to federal bonus depreciation rules.
For this reason, you should strongly consider undertaking cost segregation in Utah. In this post, we’ll explore how cost segregation works in Utah, how to maximize the benefits of depreciation, and how to procure IRS-compliant Utah cost segregation services.
Why Cost Segregation Matters in Utah
Cost segregation matters because it helps you frontload depreciation.
Under standard straight-line depreciation, you allocate the entire depreciable basis of a property linearly over 27.5 years (residential) or 39 years (commercial). However, cost segregation allows you to put various property components into different buckets consistent with their actual useful lives.
- 27.5 or 39 years: Real property (the core building structure)
- 15 years: Land/site improvements (sidewalks, parking lots, swimming pool, etc.)
- 5 or 7 years: Personal property (furniture, appliances, removable flooring, etc.)
The classification has several tax benefits, including:
- Accelerated depreciation: Because of the shorter recovery periods for site improvements and personal property, you can claim higher deductions in the initial years of property ownership.
- It helps you qualify for bonus depreciation: Assets with recovery periods of 20 years or less qualify for bonus depreciation. Therefore, site improvements and personal property qualify.
Also known as Additional First-Year Depreciation Deduction, 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. The rate depends on the year the property was placed in service.
When Should You Do a Cost Segregation Study?
Ideally, you should do a cost segregation study in the year you put a property in service. Because one of the main goals of frontloading depreciation is to maximize the compounding benefits of the time value of money, waiting for too long isn’t a good idea.
To illustrate the power of compounding, let’s use an example. On average, our clients average a first-year deduction of $171,243 when they combine cost segregation with bonus depreciation. Without cost segregation, you’d spread the $171,243 linearly over 27.5 years, giving you a $6,227 yearly deduction.
Now, assume property prices increase 5.2% yearly, and you reinvest the equivalent of the 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 have $362,985.
$690,243 – $362,985 = $327,258. In other words, you’ll be ahead by $327,258.
Therefore, the best time to do cost segregation is when:
- You put a property in service.
- You undertake significant renovations that result in the addition of shorter-lived assets.
That said, all is not lost if you didn’t do cost segregation on an eligible property earlier. You can do a study on a property put in service in prior years. In that case, you’ll apply for a change in accounting method using IRS Form 3115 and “catch up” on any depreciation you may have missed.
Utah Properties Eligible for a Cost Segregation Study
Cost segregation makes sense when the potential tax savings significantly outweigh the cost of the study. In Utah, properties with a cost basis exceeding $300,000 (excluding land) would generally qualify.
Such properties include:
- Offices: Offices and similar commercial spaces carry a lot of qualifying assets. Moreover, where a tenant requests leasehold improvements/tenant buildouts, the new assets are generally eligible for bonus depreciation.
- Multi-family units: Duplexes and apartments are great candidates because they typically contain many shorter-lived assets.
- Short-term rentals (STR): We strongly recommend doing cost segregation for short-term rentals because STRs may allow you to bypass passive activity loss (PAL) limitations. It’s a crucial point because taking a large deduction in the first year may create a paper loss.
- Industrial and warehousing facilities: These properties often contain qualifying heavy fixtures (e.g., electrical fixtures and fittings) to support specialized operations.
Cost Segregation Study Process in Utah
Cost segregation processes vary by firm and the methodology employed. At Seneca Cost Segregation, we exclusively do engineering-based studies because they are the gold standard for reliability and defensibility.
Here’s the three-step process our team follows when doing engineering-based cost segregation studies:
Feasibility Analysis and Document Collection
Are you unsure if your property is eligible for cost segregation? Contact our team for a preliminary analysis of your property. You’ll get a free proposal with an estimate of your potential tax savings.
If you decide to proceed with the study, we’ll require that you provide the necessary documents. Aside from documents proving ownership, we’ll also ask for purchase and construction/renovation drawings, blueprints, and invoices.
Property Inspection and Engineering Analysis
Depending on the property, timing considerations, and your own individual preferences, we’ll conduct either a virtual or on-site inspection of your property.
The inspection includes identifying the various components of your property, i.e., personal property, site improvements, and real property. Our engineers will then allocate costs to these assets in accordance with industry best practices and engineering costing techniques.
Engineering Report and Implementation Support
Our engineers will then compile a cost segregation report that details our asset classifications and cost allocations. We’ll explain our methodology and provide the rationale for the decisions we’ve made.
You can deliver the report to your CPA to assist with preparing your taxes. If your CPA requires assistance or clarification, we’ll be available after the study to ensure you effectively implement our findings.
Additionally, our services include the Seneca AuditDefense guarantee, which assures our support in the unlikely event of an IRS audit.
Estimate Your Cost Segregation Tax Savings in Utah
A cost segregation study helps you pull forward your tax deductions. How much cash in your pocket can cost segregation on the property you currently hold yield?
We’ve made running the numbers easy. Our team of engineers has completed over 10,200 studies across the nation. As such, we have extensive data to model typical tax savings under different cost segregation scenarios.
Use our Cost Segregation Calculator to estimate your potential tax savings. It’s free, fast, accurate, and provides easy-to-understand estimates.
Utah-Specific Tax Considerations
As we mentioned earlier, Utah fully conforms to federal bonus depreciation rules. It means you can keep the same depreciation schedule for both your federal and state taxes. Additionally, if you qualify for, say, 100% bonus depreciation at the federal level, you’ll also receive 100% in Utah.
That said, you should be mindful of Utah’s Business Personal Property Tax, which is charged at the county level. Here’s why:
- Cost segregation will result in the classification of certain assets as “personal property.”
- If the assets aren’t exempted from the tax and they weren’t in your previous county tax returns, you may see an increase in your personal property tax liability.
Still, it’s unlikely that the increment outweighs the benefit of doing cost segregation. The net tax savings from any property with a depreciable basis exceeding $300,000 make cost segregation viable in Utah. The higher the depreciable basis, the higher the net benefit.
How to Find the Right Cost Segregation Services in Utah
You likely now appreciate the power of cost segregation as a tax strategy. The IRS does too, and frequently scrutinizes reports to prevent abuse. As such, you must only depend on a provider whose studies can withstand the highest levels of IRS scrutiny.
Here’s the criteria to use when procuring Utah cost segregation services:
- Engineering-based methodology: Engineering-based studies are superior. The IRS Cost Segregation Audit Technique Guide states that a study done by an engineer is more reliable than one done by someone without an engineering or construction background.
- Extensive industry experience: You want engineers who’ve handled several cases like yours, in terms of state jurisdiction and property type. Our experienced engineers have completed over 10,200 studies nationwide.
- Audit defense: A properly done study is unlikely to trigger an audit. However, in the event of an audit, you want the firm that did the study to be available to defend its cost segregation report.
Common Mistakes to Avoid
Working with the right firm, you can avoid most of the common issues that may complicate your cost segregation tax strategy.
Even so, it helps to be aware of the following two common mistakes so you can avoid them:
- Employing short-term investing strategies: Cost-segregation is a long-term investment and tax strategy. When you frontload depreciation and dispose of the property soon after, you’ll sell it at a significant gain, triggering depreciation recapture tax.
- Not using a cost-segregation-minded CPA: You want a CPA who understands the power of cost segregation and how to navigate the relevant accounting treatments. When you work with us, we can recommend cost-segregation-minded professionals (CPAs, advisors, etc.), should you need them.
Frequently Asked Questions (FAQs)
Let’s address some of the common questions we receive about cost segregation in Utah:
Is Cost Segregation Allowed for Short-Term Rentals in Utah?
Yes, cost segregation is allowed for short-term rentals in Utah, and we strongly encourage conducting a study if you hold an STR.
If you qualify as a material participant in your STR, you may be able to use a paper loss created by claiming a massive short-term rental bonus depreciation to offset all income, including your W2 and active business income.
Can Utah Landlords Apply Cost Segregation After a Refinance?
Yes, because refinancing does not affect your property’s depreciable basis. Also, there’s no legislation or rule barring such a move.
What is the Minimum Property Value Recommended in Utah?
We believe you will benefit from cost segregation in Utah if your property’s depreciable basis exceeds $300,000.
Conclusion
Liquidity matters when you are trying to grow your Portfolio in Utah. Cost segregation provides one of the most effective ways to unlock such liquidity, enabling you to convert your depreciable basis into immediately usable cash flow.
However, you must implement this strategy strictly in accordance with IRS guidelines.
This is where Seneca Cost Segregation comes in. We conduct engineering-based studies, strictly follow the IRS Cost Segregation Audit Technique Guide, and accompany each report with accurate and complete documentation.
Contact us today to turn 20-40% of your property’s cost into immediate cash flow, which you can reinvest into other properties. Share the details of your property, and we’ll do a preliminary analysis to give you an estimate of your potential tax savings.
