Cost Segregation
Explained for Real
Estate Investors
Cost segregation is a tax strategy that identifies parts of an investment property that may be depreciated over shorter periods. For real estate investors, that means moving tax deductions into earlier years of property ownership, therefore saving significant tax money.
What Is Cost Segregation?
Cost segregation, also known as cost seg, takes a closer look at the property and separates qualifying assets from the building structure. Depending on the asset, certain components may be classified into shorter recovery periods, such as 5, 7, or 15 years.
The result does not create a new deduction. Instead, cost seg can change the timing of property depreciation, allowing eligible deductions to be taken sooner.
For eligible property owners, accelerating depreciation brings more of the property’s available deductions into the earlier years of ownership, making cost seg a central part of the overall real estate investment strategy. The resulting tax savings increase cash flow that can be directed toward renovations, reserves, or the next investment.
How Does Cost Segregation Work?
A cost segregation study breaks the property into its individual components and determines how those assets should be depreciated.
1. Review the Property
Property information is reviewed to understand the building, its value, its use, and the improvements included in the property.
2. Identify & Classify Assets
Qualifying building components are identified and classified based on the appropriate depreciation recovery period.
3. Accelerate Eligible Depreciation
Assets that qualify for shorter recovery periods may be depreciated faster than the building itself, moving more deductions into earlier years.
What Types of Properties Can Use Cost Segregation?
Cost segregation can be used for any types of income-producing real estate.
Rental homes held as investment properties.
Vacation rentals and other short-term rental properties.
Apartment buildings, duplexes and other multifamily investment properties.
Other Commercial Properties
Warehouses, self-storage facilities and other qualifying commercial real estate.
When Does Cost Segregation Make Sense?
A cost seg study is worth exploring if you:
- Purchased a new investment property
- Built a new property for secondary income
- Substantially improved or remodeled one of your rental properties
- You inherited or a property otherwise changed ownership
- Your rental has never had a cost seg study performed
See What Cost Segregation
Could Mean for Your Property
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Frequently Asked Questions About Cost Segregation
What is a cost segregation study?
Property information is reviewed to understand the building, its value, its use, and the improvements included in the property.
How much does cost segregation cost?
The cost of a study varies depending on the provider, property type, property value, and complexity of the analysis. Property owners should compare the expected tax benefit with the cost of completing the study. A cost seg study with CostSegregation.com starts at $495, but you can also estimate your cost on our pricing page.
How long does a cost segregation study take?
Timing varies depending on the property and the type of study being completed. Some studies require a more traditional engineering review, while technology-based options can significantly streamline the process.
CostSegregation.com allows you to complete study in just 15 minutes!
What properties qualify for cost segregation?
Many residential rental and commercial investment properties may be candidates for cost segregation, including single-family rentals, short-term rentals, multifamily buildings, offices, retail properties, and other commercial real estate.
Can you do cost segregation on a rental property?
Yes. Cost segregation can be used for qualifying rental properties, including many single-family, multifamily, and short-term rental properties.
Can you do cost segregation after buying a property?
Yes. A property does not necessarily need to have a cost segregation study completed in the year it was purchased. Property owners who have held a building for several years may still be able to identify previously missed depreciation.
Is cost segregation worth it?
It depends on the property and the owner’s tax situation. The property’s depreciable basis, asset mix, holding period, tax position, and cost of the study can all affect the potential benefit.
