A cost segregation study is one of the most powerful—yet frequently misunderstood—tax strategies available. When done correctly, a cost segregation study can significantly improve cash flow through an acceleration of tax deprecation.
Owners of commercial real estate, residential rental properties, and business operators who lease and improve a facility are entitled to take advantage of a cost segregation study. Here is what you need to know about this tax strategy and how to take advantage of it.
What Is Cost Segregation?
A cost segregation is a tax strategy that segregates a building’s purchase, construction, and/or improvement costs into different asset categories for depreciation purposes.
Instead of depreciating the entire asset over 39 years (commercial property) or 27.5 years (residential rental property), a cost segregation study identifies components that qualify for shorter depreciable lives. These are typically 5 years, 7 years, and 15 years.
This strategy accelerates depreciation deduction, often substantially, into earlier tax years. The accelerated depreciation is especially important given the change in the tax landscape under the recent OBBBA tax bill. The tax bill allows for 100% expensing under bonus depreciation for certain asset class-lives (mostly 15 years or less).
Why the Cost Segregation Report is a Vital Part of the Process
A cost segregation report is not just a spreadsheet or a reclassification entry. It is a technical, defensible analysis that supports the tax treatment claimed on your return.
The cost segregation report is important for several reasons:
- IRS audit documentation – it provides a detailed analysis prepared by engineers
- Accurate depreciation and compliance – details the appropriate asset classification along with the proper depreciable lives
- Reduces risk of reclassification errors for internal and tax reporting purposes
- Supports and validates long-term tax planning goals
Without a formal report, depreciation reclassifications are more likely to be challenged or disallowed on audit.
When Is a Cost Segregation Report Most Beneficial?
A cost segregation study is often worth considering when:
- Purchasing commercial or rental real estate
- Constructing or substantially renovating property
- Acquiring property through an entity transaction
- Placing improvements into service
- Improving a facility to accommodate new machinery and equipment
- Reviewing properties placed in service in prior years to identify missed opportunities for accelerated depreciation
Next Steps to Maximizing the Value of a Cost Segregation Study
A cost segregation is not simply about accelerating depreciation deductions—it’s about doing so correctly and strategically.
A well‑prepared cost segregation report can support IRS compliance, strengthen audit defense and reduce reporting risk. It can also improve your company’s cash flow and better enable your long-term tax planning.
If you’re exploring whether a cost segregation study makes sense for your property or project, our team can help you evaluate the opportunity and guide you through the process. Learn more about our Tax services and connect with our specialists.