A cost segregation study reclassifies building components from 27.5-year depreciation to 5-, 7-, or 15-year schedules. This accelerates your depreciation deductions significantly in the early years of ownership. The study costs $5,000 to $15,000 but can generate tens of thousands in additional first-year deductions for properties worth $500,000 or more.
How Cost Segregation Works
A cost segregation engineer analyzes your property and reclassifies personal property (carpet, cabinets, appliances), land improvements (parking lots, landscaping, fencing), and building components (electrical, plumbing) into shorter depreciation lives. Instead of depreciating everything over 27.5 years, some assets depreciate over 5, 7, or 15 years.
Potential Tax Savings
On a $750,000 property, a cost segregation study might allocate 20-30% to 5- and 7-year property and 15% to 15-year property. This can increase your first-year depreciation from roughly $20,000 to $60,000 or more. In the 32% tax bracket, that is an additional $12,800 in tax savings the first year.
Cost of the Study
Professional cost segregation studies cost $5,000 to $15,000 depending on property size and complexity. The IRS does not require a study, but it provides a defensible allocation if audited. Many property owners find the study pays for itself in the first year through accelerated deductions.
When a Cost Segregation Study Makes Sense
Cost segregation is most valuable for properties with a cost basis of $500,000 or more, especially new construction or substantial renovations. It is also useful if you want to offset high ordinary income in the current year. If you plan to hold the property long term, the total depreciation is the same regardless, just accelerated.