If you recently purchased, or built, a building, a cost seg may unlock massive tax deductions for you.
A cost segregation study (“cost seg” for short) is a deep-dive engineering + tax study that carves your building into bite-sized assets (carpets, wiring, landscaping, etc.). Those pieces get 5-, 7-, or 15-year lives instead of the standard 27.5 or 39 years, letting you front-load depreciation deductions—and, thanks to bonus depreciation, often write them off all in Year 1. Translation: bigger deductions now, lower taxes today, and more cash to reinvest or simply sleep better at night.
Who is a Cost Seg For?
- Own (or just bought) commercial or residential rental property
- Can be an existing building that is new to you, or new construction
- Plan to hold the property for several years (so recapture later isn’t a buzzkill)
- Sit in a high tax bracket and need current-year savings
- Have enough passive or real-estate professional income to actually use the extra loss
Who is a Cost Seg Not For?
- Flippers planning to sell in < 2 years
- Taxpayers who anticipate a Lower-income-year (save the study for a higher-tax year)
- Owners of tiny single-family rentals where the study fee may outpace the benefit
- Anyone lacking solid documentation—sloppy books = sloppy results
Example – Let’s say you are in the 32% tax bracket, and lets say you buy a $1M commercial office building. You have a cost seg performed, and the engineers are able to reclassify $300K of components from having a 39 year life to having either a 5, 7, or 15 year life. You are able to take 100 % bonus depreciation on those accelerated assets.
▸No Cost Seg = $26,000 depreciation write-off for the first year
▸Cost Seg = $318,000 depreciation write-off for the first year
▸That’s an additional $292,000 write off! Multiplied by 32% tax bracket = $93,000 in cash savings!
How to Perform a Cost Seg
- Work with a Pro: A cost seg is an advanced engineering study. Make sure you’re working with a CPA or a firm that specializes in these studies; its definitely not DIY!
- Share docs: Provide blueprints, closing statements, cost details, etc. to your specialist
- Site visit / virtual walk-through: Setup a time for the cost seg specialist to walk-through your property
- Review the report: Provide the final cost seg report to your tax preparer. They’ll be able to classify (re-classify) the building assets & get you the maximum depreciation.
How much is a cost seg study? – Naturally that depends on the size of the property & whether its residential or commercial, but you’ll likely spend anywhere between a $1,000 for a small residential rental to $10,000+ for a large commercial building.
While it is an investment to have a cost seg done, the savings are well worth it. Don’t miss out on this valuable deduction!
