ARTICLE | January 27, 2025

An often-overlooked tax-savings opportunity is accelerated depreciation of costs associated with the construction, renovation or purchase of a new building or real estate. By identifying assets that qualify for shorter depreciable lives, you can accelerate tax depreciation and lower your current income tax.

What Is a Cost Segregation Study?
A Cost segregation study is a tax strategy that allows real estate owners to take advantage of depreciation deductions in their earlier years of property ownership.

The study reclassifies certain portions of a building for federal and state income tax purposes. The result is accelerated tax lives for these portions of the building — typically 5, 7 and 15 years rather than the traditional 27.5 or 39 years for commercial and residential properties.

While the total deduction over the 27.5 or 39 years doesn’t change, the timing of the deductions does. The various components of a building, such as electrical wiring, plumbing and HVAC may be segregated. In result, this means they can be written off quicker, which may help increase cash flow for you earlier rather than later.

Benefits of a Cost Segregation Study
Cost segregation studies benefit a wide range of properties. If your company is constructing or planning to construct or substantially remodel a new building or facility, you may want to consider a cost segregation study to take advantage of the tax savings.

The benefits don’t stop with new construction. If you have a post-1986 real estate construction, building acquisition or improvement, there are opportunities to minimize your tax. Assets within existing property constructed anytime, but placed in service after 1986, can also be segregated. Even office leasehold improvements and “fit outs” contain tax-saving assets.

Assets that did not take advantage of cost segregations in the past can still qualify. The cumulative difference from shorter depreciable lives can be “caught-up” in the year of the study with a change in accounting method, creating an oftentimes large, one-time deduction.

Following are some of the key benefits of a cost segregation study, which will vary depending on the property type and other factors:

• Increased cash flow.

• Allows for future write-offs when structural components are replaced.

• Creates losses that can be carried back to prior tax years or carried forward when applicable.
• Benefits are realized in one year and amended tax returns are not required.
• Can uncover additional savings opportunities, including Section 179D Energy Efficiency Commercial Building Deduction.
• Separating tangible personal property from the nonresidential real property being constructed may reduce real estate taxes.
• Substantial sales tax savings may be achieved by classifying tangible personal property as industrial machinery and equipment. Many states provide a sales tax exemption to a company purchasing qualifying industrial machinery and equipment.

• The cost of a study is relatively inexpensive compared to the potential savings.

What Property Is Eligible and Are You a Good Candidate?
The following types of buildings and real estate are eligible for a cost segregation study:

• Apartment buildings
• Automotive dealerships and service centers
• Casinos
• Banks
• Daycare or early education centers
• Distribution centers
• Gas stations
• Hospitals
• Hotels
• Manufacturing facilities
• Nursing homes
• Office buildings
• Restaurants
• Retails shops
• Ships and ocean vessels
• Truck terminals
• Warehouses

Corporations, Partnerships, Individuals and Trusts are all potentially good candidates for a cost segregation study, especially if they:

• Have constructed or purchased property for more than $500,000; or

• Have remodel, renovation or leasehold improvements greater than $300,000.

When Should You Have a Cost Segregation Study Performed?
There are typically three scenarios when it comes to considering when to have a cost segregation study performed:

1. If you have a new construction project, a study can be started during construction. However, we will need to know all final costs before the study can be completed and your final tax return can be filed for the year the new construction project is placed in service.

2. If you have purchased property, a study should be completed before the tax return is filed for the tax year you acquired the property.

3. If you had assets placed into service in a prior year, a look-back study can be completed, which will require a special Form 3115 but will follow the same cost segregation study process.
A cost segregation study generally takes about eight weeks to complete and can vary depending on the property’s complexity. We can work with you to provide a detailed timeline and scope of work that ensures deadlines are met.

We Can Help
If you own, construct, renovate or acquire commercial real estate, a cost segregation study may be one of the most valuable tax strategies available to you. It can offer you the opportunity to defer taxes, reduce your overall tax liability and free up capital by improving cash flow. For more information about the scope of a cost segregation study, call us today.

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