Cost Segregation
Accelerate depreciation deductions on commercial property acquisitions.
Overview
Cost segregation engineering studies identify building components that qualify for accelerated depreciation, converting 39-year straight-line depreciation into 5, 7, or 15-year property classifications.
This acceleration provides significant first-year or early-year tax deductions for commercial real estate acquisitions or improvements.
Requirements
Property Characteristics
Commercial real estate valued at $500,000 minimum. Best results on properties exceeding $2M. Applicable to acquisitions, construction, or substantial improvements.
Engineering Study
Qualified cost segregation specialist performs detailed analysis of building components and construction costs.
Active Business Operations
Property must be used in active business or rental operations to utilize accelerated deductions.
Tax Benefits
Typical cost segregation study on $2M commercial property identifies $380K in accelerated depreciation components, creating approximately $100K additional first-year deduction compared to standard depreciation.
Bonus depreciation provisions (when available) allow 100% first-year expensing of qualified property, further accelerating tax benefits.
Passive loss limitations apply unless taxpayer qualifies as real estate professional or property generates active income.
Implementation
Property Analysis
Engineering firm analyzes property construction costs, architectural plans, and building components to identify reclassification opportunities.
Study Preparation
Qualified specialist prepares detailed cost segregation study documenting component classifications and supporting calculations.
Tax Return Filing
CPA incorporates study results into tax return, filing required forms and documentation. Study must meet IRS audit standards.
Important Considerations
Accelerated depreciation creates depreciation recapture upon property sale unless offset through 1031 exchange or similar deferral mechanism.
Study costs typically range from $5,000 to $15,000 depending on property complexity. Cost-benefit analysis required before proceeding.
Coordinate with your CPA to determine optimal timing and evaluate interaction with passive loss limitations, alternative minimum tax, and state tax considerations.
Discuss Implementation
Contact us to evaluate cost segregation opportunities for your properties.