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Cost Segregation 101
A building has many components, which all have different useful lives in the tax code. Components like carpet, cabinetry, specialty electrical, and land improvements (sidewalks, fencing) qualify for shorter tax recovery periods (5, 7, or 15 years) instead of the standard 27.5 or 39 years.
The purpose of a cost segregation study is to identify and reclassify costs into those shorter tax life components so you can accelerate depreciation deductions and improve cash flow. These shorter useful life assets may also be eligible for "bonus depreciation", which further increases year 1 depreciation and tax savings.
Allocating costs to shorter lives will increase your deductions in early years compared to straight-line 27.5 year or 39 year schedules.
Cost Seg Example
| 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 |
Higher depreciation → lower taxable income → improved cash flow
Note: This example is for informational purposes; actual results will depend on the specific features of your property (e.g., quality of the property, condition, year of purchase, renovation work, location, etc.).
Why Choose MVO
MVO helps real asset owners navigate the complex worlds of tax credits and incentives. Our team has 20+ years of experience performing cost segregation studies.
We are unique in the market by offering a full range of cost segregation services, from DIY studies for single-family residential properties (under our sister brandCost Seg EZ) to fully engineered studies for more complex properties and situations. We focus on delivering the highest quality reports, at a price that ensures a high ROI.
FAQs
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.
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.
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.
Bonus depreciation has been in existence in many forms since 2001, ranging from 0% to 100% at various times. Determining your bonus depreciation percentage is a multi-step process.
When did you acquire your property (typically, this is the date the transaction closed)? This determines which tax law applies to your property.
- If before September 28, 2017: Please consult your qualified tax advisor or reach out to us with questions.
- If between September 28, 2017 and January 19, 2025: Please see the table below.
- If after January 19, 2025: The applicable bonus depreciation percentage is 100%.
If you acquired your property between September 28, 2017 - January 19, 2025, then the applicable bonus depreciation percentage is based on the date Placed in Service as follows:
| Date Placed in Service | Bonus Depreciation % |
|---|---|
| 9/28/2017 thru 12/31/2022 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
| 2027 | 0% |
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.
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).
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