Cost Segregation Tax Study

Our Approach: We apply professional engineering and cost estimation procedures to determine the cost basis of our client’s real estate for federal and state income tax depreciation purposes.

Get Your Free Cost Segregation Analysis.

Get your FREE personalized and specialized tax studies for your commercial and investment properties.

What is Cost Segregation?

Cost Segregation is a method used to accelerate depreciation, minimize taxes, and enhance cash flow. An engineering-based cost segregation study breaks down the costs related to building purchases, construction, or renovations into specific components. Normally, these costs are assigned a 39 or 27.5-year depreciable life for tax purposes. However, by conducting a cost segregation study, taxpayers can reclassify these costs to shorter depreciable lives of 5, 7, or 15 years. This reclassification speeds up depreciation deductions and boosts cash flow by deferring federal and state income taxes.

  • Description text goes hereThe laws, rules, and procedures that support cost segregation studies have been in place since the Investment Tax Credit (ITC) was enacted in 1962. The legal basis for distinguishing personal property from real property under the ITC offers a solid framework for the classification process used in cost segregation studies.

    Although the ITC was repealed by the Tax Reform Act of 1986, which initially made the benefits of cost segregation unclear, a landmark 1997 tax court decision involving the Hospital Corporation of America affirmed cost segregation as a valid practice. This case was pivotal for the acceptance of cost segregation studies, leading the IRS to allow taxpayers to use these studies to separate their real property costs. Consequently, the use of cost segregation expanded, giving rise to a new industry segment and specialized professionals.

    In response, Congress and the IRS have issued various laws and rulings to further refine and expand this area, often with the goal of stimulating economic growth. These changes have significantly increased opportunities for property owners to benefit from cost segregation.

    Recent tax law revisions have enhanced the advantages of cost segregation by raising bonus depreciation rates to 100% and extending them to used property, previously limited to 50% for new property. Additionally, the CARES Act has allowed qualifying net operating losses to be carried back to each of the five preceding taxable years.

    These developments have made the benefits of cost segregation more accessible and valuable to both individual and business taxpayers.

  • The determination of what property qualifies for shorter depreciable lives is ultimately based on asset-specific facts and circumstances and precedents existing in both case law and IRS guidance.

    Determinations are made based on the data obtained from construction/cost records and information gathered during the site inspection. Key considerations include whether the property can be easily or readily moved, whether it is intended to remain in place, and does it relate to the basic operation and maintenance of the building.

    Anyone who owns real estate and expects to pay income taxes during the period of ownership can potentially benefit from a cost segregation study. Studies are most beneficial for properties with a cost basis greater than $500,000, but even lower basis amounts can find value from a study.

  • There are numerous benefits to obtaining or performing a cost segregation study. By accelerating depreciation and increasing tax deductions in the early years of property ownership, a property owner:

    • Increases their cash flow, not only potentially improving investment returns, but also positively affecting relative debt service coverage ratios,

    • Is provided with the opportunity to correct previously misclassified assets, allowing the taxpayer to claim a catch-up adjustment for the difference, and

    • May be able to reduce real estate taxes.

Cost Segregation Case Studies