Commercial real estate is typically depreciated over 39 years. A cost segregation study identifies components of a building—wiring, plumbing, flooring, landscaping—that qualify for shorter depreciation lives of 5, 7, or 15 years. The result is dramatically accelerated deductions in the early years of ownership.
How Cost Segregation Works
An engineer analyzes the property and categorizes every component into its proper asset class for tax purposes. Components that qualify as personal property (5 or 7-year lives) or land improvements (15-year life) can be depreciated much faster than the building structure itself. Combined with bonus depreciation, cost segregation can generate substantial first-year deductions.
When It Makes Economic Sense
Cost segregation studies typically cost $5,000-$15,000 for a thorough analysis. They make economic sense for commercial properties purchased or constructed for $1M or more. The additional depreciation benefit almost always far exceeds the study cost for properties of that size.
Key Takeaways
- Cost segregation front-loads depreciation by reclassifying building components to shorter depreciable lives.
- Most economic for commercial properties over $1M in cost; study cost of $5-15K is typically far outweighed by tax savings.
- Bonus depreciation on reclassified components can generate significant first-year deductions.
