Cost segregation and 1031 like-kind exchanges are two of the most valuable tax planning strategies available to commercial real estate investors. Through proper planning, both tax-deferral techniques can be used on the same properties in order to obtain the maximum benefit.However, the combination of the two can present challenges. In order to use cost segregation and 1031 exchanges together successfully, the property owner's tax advisor must be well versed in both techniques, and understand how they apply to the individual investment strategy of the client.
A 1031 exchange is almost always valuable when a taxpayer intends to hold real property, even for a relatively short period of time. This is because the cost of entering into an exchange is relatively low compared to the benefits of deferring gain on the relinquished property. This issue is more complicated when evaluating a cost-segregation study. However, a study will allow a taxpayer to substantially accelerate ordinary income deductions, the present-value benefit of which can be dramatic.
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