A cost segregation study is an IRS-approved tax savings strategy that allows property owners to reduce their tax burden dramatically by accelerating their depreciation and boosting cash flow.
A cost segregation study is a great way for real estate investors, commercial property owners and their CPAs to partner with tax cutting strategists for large returns.
Below is a complete guide to maximizing your tax savings through a cost segregation study.
What is a Cost Segregation Study?
If you own property, the IRS allows you to depreciate the value of residential rental property over 27.5 years and commercial property over 39 years. Yet, your warehouse, office building, retail space or residential unit is more than an outer shell. It contains many components that may be depreciated faster – over 5, 7 or 15 years. These include constituent elements like HVAC systems, carpeting, wallpaper, furnishings, cabinetry interior fixtures, finishes and land improvement.
Some items may be written off faster using bonus depreciation, amounting to 60% in 2024 and 40% in 2025.
Cost segregation does not create a new tax deduction. It merely reclassifies qualifying items to accelerate tax savings and claim higher deductions earlier, producing cash flow that can be invested back into the business.
What Constitutes a Cost Segregation Study?
An experienced tax strategy company ensures that the three necessary elements of a cost segregation study are completed correctly. They are:
- Analysis — of structural and non-structural components that may be classified separately.
- Reclassification – of components with shorter depreciation schedules.
- Compliance – with IRS guidelines.
A professional tax strategy company provides expertise on completing the process and ensuring it meets IRS standards.
Can I Do a Cost Segregation Study on My Own?
Performing your own analysis required to accelerate depreciation is theoretically possible, the same way you could fill your own cavity or rebuild your vehicle’s engine block. A team of tax advisors and engineers is generally required to tackle the job, which requires knowledge of building structure and IRS regulations.
The tax industry estimates that the average payoff of a cost segregation study equals 10 times its cost. Saving a few bucks to do it yourself will likely cost many times as much in missed depreciation or IRS audits.
How Does a Cost Segregation Study Work?
A qualified professional cost segregation specialist conducts a detailed property analysis ensuring IRS compliance, reclassifies components into shorter depreciation categories and incorporates the new, evidence-supported calculations in your tax return.
Potential Tax Benefits Before and After Cost Segregation
|
Scenario |
Without Cost Segregation |
With Cost Segregation |
|
Annual Depreciation |
$100,000 |
$300,000 |
|
Taxable Income |
$400,000 |
$200,000 |
|
Taxes Paid (30% rate) |
$120,000 |
$60,000 |
This example is extremely simplified for ease of understanding. For some companies employing bonus depreciation and complementary tax strategies like 179D Energy Efficiency Building Deductions, the savings may be even greater.
When Should We Conduct Our Cost Segregation Study?
The best time to conduct a cost segregation study is the year the building is constructed, purchased or renovated. The next best time is now. It is not too late for Tax Year 2024 to engage a cost segregation specialist.
How Can I Learn More About A Cost Segregation Study?
Contact National Tax Group today for a no-risk assessment of the benefits potentially available to you of a cost segregation study. We will walk you through the process and offer our honest assessment of its value to you. NTG has performed hundreds of cost segregation studies and saved clients millions of dollars in taxes.
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