Cost segregation is one of the most powerful tax-saving strategies available to commercial property owners. But like many tax strategies, it can become even more impactful when paired with other methods, one of which is grouping.
So, what is grouping? And how does it work alongside cost segregation to maximize your tax savings? Let’s break it down.
What is Grouping in the Context of Real Estate and Taxes?
Grouping refers to the IRS-sanctioned practice of combining multiple business activities or properties into a single “activity” for the purpose of meeting material participation requirements under the passive activity loss rules of Section 469.
If you’re familiar with real estate professional status or the importance of showing material participation in your rental real estate to unlock deductions, grouping can be a key strategy. By grouping properties or businesses, taxpayers may find it easier to qualify for tax benefits they’d otherwise miss, especially when it comes to cost segregation.
How Grouping Supports Cost Segregation
When you complete a cost segregation study, you accelerate depreciation by breaking your property into components with shorter lives, like 5, 7, or 15-year assets. This often creates large paper losses in the early years of ownership.
However, under IRS rules, these losses are typically considered passive, and you can’t deduct passive losses against non-passive income unless you qualify as a real estate professional and materially participate in the rental activity.
Here’s where grouping steps in. If you own multiple rental properties, you may group them together to meet the material participation threshold across the group, instead of having to meet it individually for each property. This makes it far more feasible to treat your rental activity as non-passive, unlocking the full benefit of cost segregation losses.
Example: Why Grouping Matters
Let’s say you own three commercial properties and have a cost segregation study performed on each. Without grouping, you’d need to materially participate in each property individually to use the losses against ordinary income.
But by making the grouping election, you can combine all three properties into one activity. If you spend enough time across the portfolio, you could meet the material participation threshold for the group, and use the accelerated depreciation deductions from cost segregation to significantly reduce your tax liability.
When Should You Make a Grouping Election?
The IRS allows you to make a grouping election by attaching a written statement to your tax return for the year you want the grouping to apply. You’ll want to consult with a tax professional, as the election is generally binding for future years unless your situation changes significantly.
Key reasons to consider grouping:
- You have multiple rental properties
- You plan to claim real estate professional status
- You’re using cost segregation and want to unlock full depreciation deductions
- You actively manage or are involved in the operations of your properties
Final Thoughts
Cost segregation on its own is a powerful tool, but it’s most effective when integrated into a broader tax strategy. Grouping is one of those complementary strategies that can help you meet IRS requirements and unlock deductions that would otherwise remain passive and unused.
At CSSI, we specialize in maximizing tax benefits through engineering-based cost segregation studies. We also collaborate with your tax advisor to ensure strategies like grouping, bonus depreciation, and Section 179D are used effectively to minimize your tax burden and boost your cash flow.
Want to learn more about how grouping can help you make the most of your cost segregation study? Contact CSSI today and let’s unlock your property’s full tax-saving potential.
