Considering a cost Segregation Study? Our CFO provides an overview of the benefits and why it’s important to act soon.

By Bill Roden

Cost segregation is a common practice that allows real estate owners or investors to increase cash flow by accelerating depreciation expenses to reduce taxable income. A cost segregation study assesses and then reclassifies building components and improvements from real property to personal property. The personal property assets can then be depreciated over a shorter 5, 7, or 15 year schedule rather than the traditional real property 27.5 or 39 year schedule. The personal property component comprises an average of 20 – 35 percent of total building costs and includes items such as cabinets, carpet, lighting, electrical outlets, parking lots, and landscaping. 

The Tax Cuts and Jobs Act of 2017 made the benefits of a cost segregation study even more favorable. Bonus depreciation is now allowed at 100 percent for both new and existing buildings acquired or placed into service after September 17, 2017, through the 2022 tax year. The previous bonus depreciation was 50 percent and only allowed on new property. Additionally, assets reclassified as personal property are now eligible for bonus depreciation that can be fully depreciated in the first year of ownership. The new tax benefits will be phased out beginning in 2023. 

All real estate owners and investors can potentially benefit from a cost segregation study. A study is typically completed in the first year after an acquisition or completion of construction. The IRS also allows a “look back” study. This tax rule lets owners “catch up” in a single year depreciation that could have been taken had a study been performed in the first year. To investigate the benefits of a study, owners and investors should engage qualified cost segregation firms along with their CPA firm to complete an upfront analysis to confirm that the tax reduction will outweigh the cost.