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We are going over cost segregation basics to help business owners make sense of this option when they need to improve tax savings.
If you own commercial real estate, you may have heard about cost segregation—a tax strategy that accelerates depreciation deductions and puts more money in your pocket sooner. In this guide, we’ll break down cost segregation basics, explain who benefits most, outline typical timelines, and quickly go over the key takeaways.
What Is Cost Segregation?
Cost segregation is an IRS-approved method of breaking down the costs of your commercial building into different asset categories with shorter depreciation lives.
Instead of depreciating your entire property over 39 years (for commercial) or 27.5 years (for residential rental), cost segregation reclassifies certain components—such as flooring, lighting, cabinetry, and landscaping—into 5-, 7-, or 15-year property categories.
This results in larger tax deductions in the early years of ownership, improving cash flow and freeing up funds for reinvestment.
Who Benefits Most From Cost Segregation?
While large corporations often take advantage of cost segregation, small commercial property owners can benefit just as much—especially if they meet these conditions:
- Owners of properties valued at $500,000+: While the strategy can work on smaller properties, the savings become more significant as property value increases.
- Businesses that recently purchased, constructed, or renovated a property: The fresher the expense, the greater the acceleration benefit.
- Professionals with high taxable income: The more tax you’re paying now, the more impactful an accelerated deduction will be.
- Owners planning to hold the property for several years: While benefits are front-loaded, you’ll want enough ownership time to make the study worthwhile.
Industries that often benefit include medical practices, manufacturing facilities, retail stores, restaurants, and self-storage businesses.
Typical Cost Segregation Timeline
A cost segregation project follows a relatively predictable process:
- Engagement & Data Gathering (1–2 Weeks): The tax specialist or engineering firm collects building plans, invoices, and other records.
- Engineering-Based Study (3–6 Weeks): Engineers and tax professionals analyze the property’s components, site improvements, and construction costs.
- Final Report Delivery (1–2 Weeks): A detailed IRS-compliant report is prepared, showing reclassified assets and their accelerated depreciation schedules.
- Tax Filing & Benefit Realization: Your CPA incorporates the accelerated deductions into your return, often resulting in immediate tax savings.
Total Timeline: 5–10 weeks from start to finish.
Key Takeaways
- Cost segregation basics: It’s a tax strategy that accelerates depreciation for certain building components.
- Best for: Owners of commercial property with high taxable income and significant recent investments in real estate.
- Typical timeline: Around 5–10 weeks from engagement to report.
- Big benefit: Front-loaded deductions can significantly improve early cash flow.
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