Question 1

What is cost segregation and how does it work?

Accepted Answer

Cost Segregation is an IRS-approved tax planning strategy that can provide companies or individuals who have acquired, constructed, or renovated real estate assets with increased cash flow by accelerating the deductions from depreciation and reducing income taxes. A cost segregation study is an engineering-based analysis of real estate assets to identify the costs of components that can be depreciated more quickly for tax purposes. Typically, real estate assets are depreciated over 27.5 or 39 years for federal and state income tax purposes. However, the tax code allows certain assets to be depreciated over 5, 7, or 15 years. These assets are also eligible for first year bonus depreciation. As much as 20% to 50% of the cost of a real estate property may be eligible. By identifying and accelerating depreciation deductions, cost segregation decreases federal and state income taxes and increases cash flow to the owner of the real estate asset. You can learn more about how cost segregation works here .

Question 2

What types of properties qualify for cost seg?

Accepted Answer

Most income-producing properties qualify including: short term rentals, apartments, condos, office buildings, retail centers, warehouses, manufacturing facilities, hotels, and medical facilities. Properties must be used for business or income-producing purposes, not be a personal residence.

Question 3

How do I determine my depreciable basis?

Accepted Answer

The depreciable basis of your property is generally the purchase price less land value (which is not depreciable for tax purposes), plus any post-purchase improvements to the property. There are a number of ways to estimate the land value, including an appraisal, using a ratio based on the property tax assessment, or researching vacant land sale comps. If you have questions, feel free to reach out to us.

Question 4

What is my bonus depreciation %?

Accepted Answer

Bonus depreciation depends on when the property was acquired and placed in service. The applicable percentage has changed over time, so review the date-based schedule or consult your tax advisor to confirm the correct percentage for your property.

Question 5

When should I do my cost seg?

Accepted Answer

Ideally in the same tax year as your acquisition, construction, or renovation — but look-back studies (studies done years later) are very common and can still deliver very attractive tax savings. With a look-back study you do a catch-up without amending prior returns.

Question 6

Can I prepare a cost segregation study myself?

Accepted Answer

The IRS has an Audit Technique Guide, where it describes the best practices for a cost segregation report that will be accepted by the IRS during an audit. The IRS explicitly states that a cost segregation expert should conduct the study and create the report, and that significant construction and engineering experience is required (See page 35).

Purchase price for a short term rental	$1,000,000
% allocated to land (not depreciable)	20%
Depreciable basis	$800,000
% reclassified into shorter life categories	~ 25%
Assets eligible for bonus depreciation with cost seg	~ $200,000
Year 1 tax savings with cost seg at a 37% tax rate	~ $74,000

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