Cost Segregation
Cost segregation is an essential tool for real estate investors to minimize state and federal income taxes. Many real estate investors who use it pay little or no income taxes. None. It’s that powerful, particularly for real estate purchased from September 28, 2017, through December 31, 2022.
What is Cost Segregation?
A specialized engineering analysis that unlocks significant tax savings by reclassifying assets to qualify for accelerated depreciation, putting more money back into your business today.
Cost segregation services separate short-life and long-life real estate components, to maximize real estate depreciation and minimize state and federal income taxes.This process includes identifying personal property and land improvements that qualify under federal tax code.
Certain costs depreciate faster and have a shorter tax life than others. For example, landscaping, carpet, signage, paving, and blinds are all short-life items depreciated over 5, 7, or 15 years. Your main building structure is depreciated over 30 or 40 years.
Tax Cuts and Jobs Act of 2017 – aka Bonus Depreciation
The Tax Cuts and Jobs Act of 2017 allow real estate investors to deduct the depreciation of the total cost of the short-life property of 20 years or less. For commercial and residential rental real estate, short-life items account for 20 to 45% of the total purchase price. This means the government funds 30 to 60% of the down payment in income tax savings. The Tax Cut and Jobs Act affect cost segregation for property purchased between September 28, 2017, and December 31, 2022.
The One Big Beautiful Bill and Reinstatement of Bonus Depreciation While the Tax Cuts and Jobs Act of 2017 was originally scheduled to sunset, starting December 31, 2022, On July 4, 2025, The One Big Beautiful Bill was signed into law permanently reinstating 100% bonus depreciation. Qualifying assets put into service after January 19, 2025 can now be written off immediately, which keeps cost segregation a valuable strategy for maximizing deductions.
Updated Bonus Depreciation Timeline
- Sept. 28, 2017 – Dec. 31, 2022 100% bonus depreciation available under the Tax Cuts and Jobs Act (TCJA).
- 2023 80% bonus depreciation (first step in the scheduled phase-down).
- 2024 60% bonus depreciation.
- Jan. 1 – Jan. 19, 2025 40% bonus depreciation (final phase of the TCJA phase-down).
- Jan. 20, 2025 and onward 100% bonus depreciation permanently restored
Example of Cost Segregation Tax Savings
The Tax Cuts and Jobs Act (TCJA) turbo-charged the benefits of cost segregation. Consider the case of a garden-apartment project purchased for $5 million with a $1 million down payment.
| Before TCJA | After TCJA | |
| Year-One Depreciation | $300,000 | $1,575,000 |
| Tax Savings at 37% (federal only) | 111,000 | 582,750 |
The federal government funds almost 60% of the $1 million down payment. Assuming another 13% taxes for state taxes, the year-one savings are $787,500, almost 80% of the total down payment!
How Does a Cost Segregation Study Work?
A Cost Segregation Study works by breaking down a real estate acquisition into short-life and long-life asset categories. Your CPA uses this detailed breakdown to calculate depreciation correctly, as required by the IRS, while you — the property owner — benefit from the accelerated deductions and improved cash flow demonstrated above.
Is Cost Segregation Worth It?
Yes, without a doubt. The pricing for the above cost segregation study might be $5,000 to $7,000 depending on a variety of factors. Year-one tax savings of $582,750 are about 100 times the cost of the study. Where else can you obtain a 10,000% return on investment with no risk?
Myths About Cost Segregation Studies
Some believe cost segregation only defers payment of income taxes. This is simply not true; Cut My Taxes can prove it in a free preliminary analysis. The truth is that it reduces and defers income taxes. Depreciation is never taxed if the asset is in your estate due to the step-up in basis or if you do a 1031 exchange. Even if you sell, the depreciation recapture is mostly at the capital gains rate instead of the ordinary income rate.
Free Cost Seg Calculator
See how much you can save with the free cost segregation calculator. No personal information such as name, phone number, or email address is required. Use the calculator on the right to estimate how much money you could save.
O’Connor means property tax reduction with the right attitude.
- The government wants your money.
- You earned it; it is your money.
- Let us help YOU keep more of YOUR money.
Call us today or email us at proptax@poconnor.com to learn more about the benefits of using a cost segregation company to maximize your tax savings.
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Calculated Results
Ready to get a free, no-obligation preliminary Cost Segregation Analysis for your commercial property? You’ll know before you commit to the detailed study of your total investment and the probable return on your investment… removes all your risk!
Most studies generate a payback ratio for 5:1 or higher.
