Call us Toll Free
(844) 332-5575

How Cost Segregation Works

Under United States tax laws and accounting rules, cost segregation is the process of analyzing and identifying personal property assets that are grouped with real property assets, and separating out personal assets for tax reporting purposes. A cost segregation study identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income tax obligations. Personal property assets include a building’s non-structural elements, exterior land improvements and indirect construction costs.

Analysis of personal property assets is used to determine appropriate asset classifications. Cost segregation identifies building costs that would typically be depreciated over a 27.5 or 39-year period and reclassifies them to permit a shorter, accelerated method of depreciation for certain building costs. Costs for non-structural elements, such as wall covering, carpet, accent lighting, portions of the electrical system, and exterior site improvements such as sidewalks and landscaping, can often be depreciated over five, seven or 15 years, rather than over 27.5 or 39 years.

Identify assets that are currently being depreciated over 27.5 and 39 years and reclassify them as assets that can be depreciated over 5, 7 and 15 years. This process loads up your front end depreciation on assets, giving the property owner a larger current deduction, which reduces their current tax obligation.

Real property eligible for cost segregation includes buildings that have been purchased, constructed, expanded or remodeled since 1987. A study is typically cost-effective for buildings purchased or remodeled at a cost greater than $200,000. A cost segregation study is most efficient for new buildings recently constructed, but it can also uncover retroactive tax deductions for older buildings which can generate significant short benefits due to “catch-up” depreciation. The following is a list of eligible properties. This is not an exhaustive list as every commercial building qualifies for Cost Segregation study benefits.

• Apartment complexes
• Automobile dealerships
• Distribution centers
• Fast food restaurants
• Food processing facilities
• Gas Stations
• Hotels/motels
• Manufacturing plants
• Medical centers
• Nursing homes
• Office buildings
• Retail chains/franchises
• Shopping malls
• Self Storage
• Sports stadiums
• Amusement parks
• Supermarkets
• Casino

Benefits to commercial real estate owners.

Cost segregation studies identify and reclassify building components into the appropriate MACRS tax depreciation categories.

• Maximize annual depreciation
• Reduce up front income tax costs
• Lower cost of capital
• Improve cash flow
• Improve shareholder value
• Reduce some states’ local property tax

Cost segregation studies are available to the following commercial building owners:

• Purchased real property since 1987
• Constructed a new facility since 1987
• Properties that were renovated, expanded or restored
• Existing buildings where leasehold improvements were Installed

Bldg Type: Dental Center
Bldg Cost: 688K
Year Acquired: 2013
Increase Cash Flow: $93,000

Bldg Type: Multi Family
Bldg Cost: $3.1 MIL
Year Acquired: 2022
Increase Cash Flow: $409,000

Bldg Type: Warehouse
Bldg Cost: $2MIL
Year Acquired: 2021
Increase Cash Flow: $193,000

Bldg Type: Veterinary
Bldg Cost: 700K
Year Acquired: 2022
Increase Cash Flow: $78,000

Bldg Type: Strip Center
Bldg Cost: $1.2MIL
Year Acquired: 2021
Increase Cash Flow: $232,000

Bldg Type: Bank
Bldg Cost: 503K
Year Acquired: 2021
Increase Cash Flow: $74,000

Bldg Type: Medical
Bldg Cost: $3.6MIL
Year Acquired: 2022
Increase Cash Flow: 322,000

Bldg Type: Office Condo
Bldg Cost: $1.9MIL
Year Acquired: 2021
Increase Cash Flow: $241,000