Unlocking the Power of Cost Segregation Studies
If you’re a real estate investor or business owner with income-producing property, cost segregation is a tax strategy you shouldn’t overlook. It’s a powerful way to accelerate depreciation, reduce taxable income, and increase cash flow—especially in the early years of owning a property.
What Is Cost Segregation?
Cost segregation is an IRS-approved method of reclassifying components of a building from a standard 27.5-year or 39-year depreciation schedule (for residential and commercial property, respectively) into shorter-lived assets—typically 5, 7, or 15 years.
Instead of depreciating the entire building slowly over decades, this strategy allows you to separate out parts like:
Flooring and cabinetry (5-year property)
Storage shed (7-year property)
Driveways and landscaping (15-year property)
By accelerating depreciation on these components, you can dramatically reduce your taxable income in the early years of property ownership.
Why Does Cost Segregation Matter?
Here are the primary benefits:
Significant upfront tax deductions
Investors can front-load depreciation deductions, creating a major tax shield in the immediate years after acquiring or improving a property.Improved cash flow
Reduced tax liability means more cash on hand for reinvestment or debt reduction.Bonus depreciation opportunity
Bonus depreciation is currently at 40% for assets placed in service in 2025. However, the current administration is pushing to bring it back to 100%, which could lead to significant tax savings on the first year of service.
When Should You Consider a Cost Segregation Study?
You should consider a cost segregation study if:
You need to offset large gains on your passive investments
Most of the value of your property is in the building, not the land
You’re in a high tax bracket and looking to reduce your current-year tax liability
You want to maximize bonus depreciation while it’s still available at enhanced rates
It’s also worth evaluating older properties, especially if you haven’t yet maximized depreciation deductions.
Example: Real Estate Investor With a $1M Rental Property
Let’s say you bought a rental property in 2020 with a building value of $1M . Without cost segregation, you’d depreciate it over 27.5 years, getting around $36,363 per year. But with a cost segregation study, you might shift $300,000 of the value into 5-, 7- and 15-year property. Applying 100% bonus depreciation for 2020, you could deduct $300,000 in year one—significantly reducing your tax liability and improving your bottom line.
Important Considerations
Professional studies are key. A cost segregation study should be conducted by engineers experienced in real estate tax law.
Recapture rules apply. Accelerated depreciation can trigger depreciation recapture when you sell, but careful planning (like 1031 exchanges) can help manage this.
Final Thoughts
Cost segregation is one of the most underutilized tax strategies available to real estate investors and business owners. When implemented correctly, it can deliver multiple thousands of tax savings and significantly boost early-year returns.
Before your next tax season rolls around, consider speaking with a qualified CPA who understands how to integrate cost segregation into a broader tax planning strategy. It could be the difference between a good investment—and a great one.