Frequently Answered Questions
Cost Segregation is a strategic tax planning tool that allows real estate owners to accelerate depreciation deductions. Instead of depreciating the entire building over 27.5 years (residential) or 39 years (commercial), we break out components like flooring, cabinets, lighting, HVAC, electrical, and land improvements. These items qualify for shorter recovery periods (5, 7, or 15 years). The result: a larger depreciation expense in the early years of ownership, which reduces taxable income and increases cash flow.
Any investor who owns income-producing real estate can benefit. You can see advantages on all types of properties such as: residential 1-4 unit properties, commercial properties, apartment complexes, etc… Most properties can generate meaningful deductions. If you pay federal income tax and own real estate, Cost Segregation is worth considering.
Virtually all types of real estate qualify, including:
- Multifamily apartments.
- Hotels, resorts, and short-term rentals.
- Office buildings.
- Retail centers and restaurants.
- Industrial facilities and warehouses.
- Medical and dental offices.
- Single-family and multifamily rentals (1 to 4 unit properties).
Savings vary by property, but on average 20% to 40% of the property’s basis can be reclassified into shorter depreciation schedules. For example, a $5 million building might generate $1 million to $2 million in accelerated depreciation, translating to hundreds of thousands in immediate tax savings.
The ideal time is in the year the property is placed in service (purchased, built, or remodeled). However, studies can also be done retroactively. If you’ve owned the property for several years, you can file IRS Form 3115 (Change in Accounting Method) to “catch up” on all missed depreciation in the current year, with no amended returns needed.
Most studies are complete within 30 days of receiving the property information we need. Timing depends on how quickly we can arrange the site review and on the completeness of your closing statement, depreciation schedule and any construction records. If you are working against a filing deadline, tell us up front and we will confirm the schedule before you engage.
Yes. The IRS has formally recognized Cost Segregation since 1997. To comply, studies must be detailed and engineering-based, with proper documentation and schedules. Our reports are built to withstand IRS scrutiny.
Land itself is not depreciable, so the purchase price of your property must be allocated between land and building. Typically, this allocation is determined using the county assessor’s property tax records or an appraisal. For example, if the assessor values the land at 20% and improvements at 80%, and you bought the property for $1 million, your building basis is $800,000 and land is $200,000. We can help you confirm this during the intake process.
“Date placed in service” is the date the property is ready and available for its intended use, not just when you purchased it. For a rental property, it’s usually the date it’s available for tenants (listed for rent, even if not yet occupied). For commercial properties, it’s when the building is open and operational. This date is crucial because it determines the tax year in which depreciation begins.
The building basis is essentially your starting point for depreciation. It’s the portion of the purchase price (plus eligible acquisition costs or improvements) that applies to the building, after subtracting land value. For example:
- Purchase Price = $1,000,000
- Land Allocation (20%) = $200,000
- Building Basis = $800,000 (the amount eligible for depreciation and Cost Segregation)
Yes, properties acquired through a 1031 exchange can still be great candidates for Cost Segregation. The study allows you to accelerate depreciation and increase cash flow by reclassifying assets into shorter tax lives. However, bonus depreciation is not available on assets acquired through a like-kind exchange. The benefits come strictly from the standard accelerated depreciation schedules (5-, 7-, and 15-year property), which can still generate substantial tax savings.
Yes, potentially. Once a personal residence is converted into an income-producing rental, it becomes eligible for depreciation. A Cost Segregation study can accelerate deductions by reclassifying building components into shorter tax lives. However, properties converted from personal use are not eligible for bonus depreciation; the savings would come from accelerated depreciation only. The value depends on your home’s basis, rental strategy, and how long you intend to keep it as a rental.
Bonus depreciation allows you to deduct the full value of certain short-life assets immediately instead of spreading them out. Under the latest tax law changes (the “Big Beautiful Bill”), 100% bonus depreciation is back for properties placed in service after January 19, 2025. This makes Cost Segregation even more powerful because all the 5-, 7-, and 15-year property we identify can often be written off in year one.
Costs depend on property size and complexity, generally starting at less than $1,000 for 1-4 unit residential properties. The return is substantial: studies routinely deliver 10x to 100x the cost in tax savings. For example, a $10,000 study could easily generate $500,000 in accelerated deductions.
If your return is audited, a properly documented Cost Segregation study is your best defense. Our reports include detailed engineering schedules, photos, and supporting data that meet IRS standards. With this level of documentation, your deductions are highly defensible.
Still have questions?
Don't hesitate to reach out for a free, no-obligation consultation.