UNDERSTANDING COST SEGREGATION
Cost Segregation is an IRS-approved, engineering-based method that allows commercial property owners to accelerate depreciation and maximize tax savings.
By identifying and reclassifying individual building components—such as electrical systems, plumbing, and flooring—into shorter depreciation categories, owners can write off the value of those components more quickly, significantly reducing taxable income.
HOW DID COST SEGREGATION BEGIN?
The origins of Cost Segregation date back to 1962, when the Investment Tax Credit initially allowed the separation of a building’s components for accelerated depreciation. Although the credit was repealed in 1986, the practice gained new life in 1997 when the Hospital Corporation of America successfully defended its use of an engineering-based Cost Segregation study in court. This victory established the legitimacy of the method and set the foundation for its growing popularity.
In 2004, the IRS formalized the guidelines for Cost Segregation studies by issuing the Audit Techniques Guide. This document provided clear criteria for conducting a quality study and offered IRS agents direction on reviewing Cost Segregation reports. Since then, Cost Segregation has become a familiar and highly effective tax strategy for commercial real estate owners.
THE CARES ACT AND EXPANDED BENEFITS
The CARES Act of 2020 significantly enhanced the benefits of Cost Segregation, particularly for property owners making Qualified Improvement Property (QIP) updates. The Act corrected an oversight in the 2017 Tax Cuts and Jobs Act (TCJA), which had misclassified QIP, causing property owners to miss out on valuable tax savings.
Under the CARES Act, improvements to the interior of nonresidential buildings are now classified as 15-year depreciable property, making them eligible for 100% bonus depreciation. This change allows property owners to deduct the total cost of these improvements in the year they are made, and it is retroactive to January 1, 2018. Property owners can amend their 2018 and 2019 tax returns to claim additional depreciation and increase their tax savings.
GET THE MOST OUT OF YOUR COMMERCIAL PROPERTY
ACCELERATED DEPRECIATION
Reclassifying components into shorter depreciation schedules (5, 7, or 15 years instead of 39) allows owners to claim larger deductions in the early years of ownership.
IMMEDIATE TAX SAVINGS
Cost Segregation provides substantial tax savings in the year the study is completed, helping owners lower their tax burden and increase profitability.
INCREASED CASH FLOW
By reducing taxable income, owners can free up significant cash flow to reinvest in their properties or other opportunities.
RETROACTIVE BENEFITS
With recent changes in tax law, property owners can even apply Cost Segregation retroactively to prior tax years, further enhancing their savings.
BONUS DEPRECIATION
For qualified property improvements, owners can take advantage of 100% bonus depreciation, allowing for an immediate write-off of certain assets.
AUDIT PROTECTION
When conducted by a qualified provider, Cost Segregation studies are fully IRS-compliant, providing property owners with the documentation they need to withstand any audit scrutiny.
IS YOUR PROPERTY ELIGIBLE?
Cost Segregation is ideal for commercial property owners, real estate investors, and developers who have purchased, constructed, or renovated properties within the last few years. If you own a building placed in service after 2017 or made significant improvements to your property, a Cost Segregation study can unlock substantial tax savings for you.
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