cost segregation real estate buildings

How Cost Segregation Studies Work

Greg Bryant

Senior Managing Director

Are You Looking to Free Up Capital for Your Company? 

Cost Segregation studies might be the solution you need. 

By accelerating the depreciation of tangible personal property (§1245), land improvements, and Qualified Improvement Property (QIP) as well as identifying various expensing opportunities associated with commercial and residential properties, a Cost Segregation study can help maximize depreciation (and therefore increase cash flow). The accelerated time frame is typically 5, 7, and 15 years rather than 27.5 or 39 years for the building (§ 1250). 

How Cost Segregation Studies Work

Cost Segregation is a highly beneficial and widely accepted tax strategy utilized by owners of commercial and residential rental property to accelerate depreciation deductions, defer taxes, and improve cash flow.

Similar to an interest-free loan, a Cost Segregation study front-loads the depreciation a property would otherwise receive over 27.5 or 39 years.

Each Cost Segregation study utilizes the expertise of specialists such as professional engineers and architects with years of experience who conduct a site visit and analyze data including depreciation schedules, construction drawings, invoices, and change orders.

The Source Advisors process follows the IRS’ guide Cost Segregation Audit Techniques and the ASCSP MQS, which include: 

  • Pre-qualification and proposal
  • Request and gather data 
  • Perform site visit and study
  • Study is reviewed for accuracy
  • Report is finalized 

Is Your Property a Candidate?

Your property might be a candidate for a Cost Segregation study if:
  1. It was placed in service since 1987 through, generally speaking, most studies are limited to the last 20 years 
  2. Is currently depreciating over 27.5 or 39 years
  3. There are $500,000+ in capitalized costs
  4. It has been acquired, constructed, expanded, or remodeled

Cost Segregation Study Timing

The ideal time to have a Cost Segregation study conducted is during the year the commercial property is being purchased, remodeled, or constructed. However, if this timeframe has passed, it’s possible to perform a lookback study to correct your depreciation schedule without having to amend returns.

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