What is a Cost Segregation Study?

A cost segregation study is a powerful tax strategy used by real estate investors and property owners to increase cash flow by accelerating depreciation deductions.

Instead of depreciating an entire building over 27.5 or 39 years, a cost segregation study
breaks the property down into components that can be depreciated over shorter timeframes—such as 5, 7, or 15 years.

How It Works

When you buy, build, or renovate a property, the IRS typically requires you to depreciate the value of the building
over a long period:

• 27.5 years for residential rental properties
• 39 years for commercial buildings
  

However, many parts of a property—such as flooring, cabinetry, lighting, landscaping, and wiring—qualify for
shorter depreciation periods. A cost segregation study identifies and reclassifies these components so they can
be depreciated more quickly.

Why It Matters

By accelerating depreciation, you can reduce your taxable income in the early years of owning the property.
This means:

• Lower taxes now
• Improved cash flow
• More capital available for reinvestment

For example, a $1 million commercial property might allow $200,000–$300,000 or more in first-year depreciation when a
cost segregation study is applied—compared to around $25,000 without it.

Who Should Consider It?

Cost segregation is ideal for:

• Real estate investors
• Commercial property owners
• Owners of rental properties

Typically, the strategy makes the most sense for properties valued at $500,000 or more.

Professional Support

A cost segregation study should be performed by professionals—usually a team of engineers and tax specialists—who understand
construction, tax law, and IRS guidelines. The results must be well-documented in case of an audit.