Frequently Asked Questions

Cost segregation is a tax planning strategy that allows businesses and real estate investors to accelerate depreciation deductions by reclassifying certain building components into shorter-lived categories. This can significantly reduce taxable income in the early years of property ownership. There are no amended returns, the opening of closed tax years, or an increased chance of audit. Every Fortune 5000 company has segregated its commercial property.

Any business or individual that owns commercial real estate, residential rental property, or other types of income-generating property can benefit from cost segregation. Those with significant tax liabilities will benefit the most. This includes vertical markets such as retail, manufacturing, hospitality, restaurants, leasehold improvements, and healthcare.

Cost segregation works by identifying and reclassifying personal property assets (like fixtures, flooring, kitchens, security systems, and specialty electrical systems) and land improvements (like parking lots and landscaping) that are typically depreciated over 39 or 27.5 years to shorter-lived assets that can be depreciated over 5, 7, or 15 years.

Almost any type of commercial, residential rental property and leasehold improvements can be eligible for cost segregation, including office buildings, warehouses, hotels, apartment complexes, shopping centers, and more. Both new constructions and existing properties can benefit from this.

The amount of savings varies depending on the property type, age, and specific components. On average, property owners can expect to reclassify 15-25% of their property into shorter depreciation lives, leading to significant tax savings of tens or even hundreds of thousands of dollars. On average, for every $100,000 in building basis, an additional depreciation expense of $20,000 can be created in the current year.

The best time to consider a cost segregation study is when you purchase, construct, or significantly renovate a property. However, you can also perform a cost segregation study on properties you have owned for several years and apply the benefits retroactively. Because cost segregation is optional, it is sometimes best to wait until there is a tax liability that can be reduced or eliminated.

Yes, cost segregation can be applied retroactively to older properties, allowing owners to catch up on missed depreciation through a “catch-up” adjustment.

A cost segregation study entails a thorough engineering analysis of the building and land improvements, which includes examining construction documents, conducting site visits, and identifying components eligible for shorter depreciation periods. Subsequently, a detailed Engineering-based report is compiled to justify the reclassification of these components.

Documentation typically includes closing documents, appraisals, inspections, construction invoices, and depreciation schedules, which will support asset reclassification.

The duration of a cost segregation study can vary, but it typically takes between 4 to 6 weeks, depending on the complexity and size of the property.

The cost of a cost segregation study varies, depending on the complexity and size of the property. However, the tax savings will typically far outweigh the cost of the study. Typically, the ROI will be at least 10-1.

Yes, cost segregation is a legal and recognized and accepted tax strategy by the IRS. The IRS has issued guidelines and rulings that outline the proper procedures for conducting cost segregation studies and classifying property components.

While theoretically possible, performing a cost segregation study requires specialized knowledge in engineering, construction, and tax law. It is highly recommended that professionals with experience in cost segregation be hired to ensure accuracy and compliance with IRS guidelines. The IRS has stated that a third-party engineering firm should do a quality cost segregation report with cost construction experience. The fees must also be fixed and not dependent upon the amount of tax savings. If a third-party engineering firm performs the study, the audit risk is substantially reduced or even eliminated.

Bonus depreciation allows for the immediate deduction of a percentage of the cost of qualifying assets. Cost segregation can identify these assets, enabling property owners to maximize bonus depreciation benefits in the current tax year. Although bonus depreciation has been reduced since 2022, it is still an excellent way to reduce or eliminate the current year’s tax liabilities.

Yes, cost segregation can be part of a broader tax strategy and can be combined with other tax planning techniques, such as 1031 exchanges, historical tax credits, 179D and 45L, and R&D tax credits.

The Tax Cuts and Jobs Act increased the benefits of cost segregation by allowing 100% bonus depreciation on qualifying property placed in service after September 27, 2017. In tax year 2024, bonus depreciated has been reduced to 60% of qualifying property. Congress will hopefully reinstate 100% Bonus depreciation in the near future.

It’s generally not necessary to update a cost segregation study unless the property undergoes significant renovations or changes.