Cost Segregation

Cost Segregation is a tax strategy used by real estate investors that accelerates the depreciation deductions they can take on their property. The goal of a cost segregation study is to identify assets within a property that can be depreciated over a shorter time period (5, 7, or 15 years) rather than the standard depreciation periods of 27.5 years for residential property and 39 years for nonresidential.

A cost segregation study involves a detailed analysis of the costs associated with a property. These costs are then categorized into various "asset classes," each with its own depreciation schedule.

Some of the types of property that can be segregated for faster depreciation include:

Personal Property: Items such as equipment, furniture, and appliances can be depreciated over a 5 or 7 year period.

Land Improvements: Items like landscaping, parking lots, and fencing can be depreciated over a 15 year period.

The benefit of a cost segregation study is that by accelerating depreciation, the property owner can reduce their current income tax liability, providing significant tax savings in the early years of property ownership. These savings can then be reinvested into the property or used for other purposes.

However, cost segregation studies can be complex and require detailed, accurate records. They should be conducted by a professional with experience in cost segregation, such as a tax specialist or a certified public accountant. Furthermore, it's important to understand that while cost segregation can provide tax benefits in the short term, it may result in higher tax liability in the later years of property ownership due to the recapture of depreciation.

As always, property owners should consult with a tax professional before making decisions about cost segregation or other tax strategies.