Cost Segregation is a tax-saving strategy that allows property owners to accelerate depreciation on components of a building. This leads to larger upfront tax deductions, improving cash flow. Typically, buildings are depreciated over 27.5 to 39 years, but with Cost Segregation, certain elements like fixtures, landscaping, or flooring can be depreciated over 5, 7, or 15 years. 

Cost Segregation helps property owners accelerate depreciation, leading to larger tax deductions earlier in a property’s life. This can significantly improve cash flow, providing additional funds for reinvestment or operational costs. It’s particularly beneficial for reducing tax liability on newly acquired or constructed properties, but it can also help existing properties through catch-up adjustments. 

Any income-generating property can benefit from Cost Segregation. This includes residential rental properties, commercial buildings, office spaces, industrial facilities, retail stores, and even specialized properties like car washes, gas stations, self-storage, or RV Parks. Essentially, if your property is used for business and incurs depreciation, it qualifies. 

Cost Segregation can complement a 1031 Exchange by allowing you to maximize depreciation on the replacement property. After the exchange, a Cost Segregation Study can accelerate depreciation deductions, helping offset any taxable income, thereby optimizing tax deferral benefits. 

A Cost Segregation Study must classify property components (e.g., personal property, land improvements) with proper cost allocation and depreciation schedules. It should be prepared by a professional using reliable data, follow IRS guidelines, and be defensible in case of an audit. The study should be filed promptly or retroactively by using Form 3115.

The full IRS Guidelines can be found by clicking HERE