What is a Cost Segregation Study?

Owning or developing commercial real estate comes with its fair share of complexities. Among these, a cost segregation study stands out as a potent tool that many property owners overlook. This powerful strategy can significantly maximize depreciation deductions and lessen the tax burden for commercial property owners.

Why is it so often overlooked? The answer lies in unfamiliarity. Real estate owners, investors, and their tax advisors often lack the understanding of what a cost segregation study entails and the financial benefits it can yield. Spoiler alert: It could save your company a substantial amount of money.

In this blog post, we aim to demystify cost segregation studies, explaining how they work and the tax advantages they offer.

Understanding Cost Segregation Studies

Typically, for income tax purposes, property owners and real estate investors depreciate residential rental property over 27.5 years and commercial property over 39 years. However, a property is not just the structure alone—it comprises various elements like plumbing fixtures, carpeting, sidewalks, fencing, and more.

If purchased separately, these assets could be depreciated over five, seven, or 15 years. But since they are usually part of a building acquisition or development, they are written off over the same useful life as the rest of the building: 27.5 or 39 years.

Here’s where a cost segregation study comes into play. This process scrutinizes each element of a property, categorizing them to allow for an accelerated depreciation timeline for certain building components.

The Significance of Cost Segregation Studies for Property Owners

Why should property owners care about segregating the costs of a property? The answer lies in the financial benefits. Though a study requires an initial investment, the tax savings from accelerating depreciation deductions can enhance cash flow over several years.

Cost segregation studies leverage the time value of money. However, if you don’t plan on holding onto the property long-term, you might not benefit from a cost segregation study since any initial benefits reverse upon the property’s sale.