Definition
A detailed analysis that breaks down property costs into components with shorter depreciation periods, allowing larger tax deductions in early years.
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Cost segregation studies identify personal property and land improvements that depreciate faster than the building structure. Personal property may depreciate over 5-7 years instead of 27.5 years. This creates front-loaded tax deductions that benefit investors in early years of ownership. Studies cost $3,000-$10,000 but often provide $20,000+ in additional deductions. The IRS allows cost segregation retroactively through amended returns.
Pro Tip
Commission a cost segregation study on commercial properties over $1 million for maximum tax benefit.
Example
A cost segregation study on a $2 million office building identified $400,000 in personal property that could be depreciated over 7 years instead of 39 years.