Cost Segregation Study

Cost Segregation Services

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If you own commercial real estate, the IRS usually expects you to claim tax deductions over 39 years. But there’s an opportunity to break down your property into smaller parts — for example, equipment, furniture, fixtures, etc. — that can be written off much faster. This accelerates tax deductions, putting more money in your pocket right away. To make the most of this, you need to plan carefully and understand the rules.

While we don’t perform cost segregation studies in-house, we work closely with a trusted cost segregation partner who conducts the engineering-based study. Our role is to introduce you to the right resource, help guide you through the process, and stay involved once the study is complete, so the results are properly considered in your broader tax strategy. It’s essential to have your advisory partner with you along the way.

For our clients, cost segregation can be a valuable planning opportunity when you acquire, build, renovate, or improve commercial real estate. This service is best suited for commercial real estate owners, developers, and businesses that own or improve property, such as office buildings, industrial facilities, retail centers, and healthcare facilities.

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Maximizing Tax Benefits Through Cost Segregation >

Depreciation Expensing Changes in the One Big Beautiful Bill Act >

Understanding Cost Segregation for Property Owners

The purpose of a cost segregation study is to find personal property and land improvements that qualify for shorter recovery periods of 15, 7, or 5 years rather than the default of 39 years. Separating a building into its parts and identifying which qualify for shorter depreciable lives allows those parts to be deducted faster for tax purposes, helping owners increase their current cash flow with an immediate tax benefit.

Commercial property includes offices, retail stores, warehouses, mixed‑use buildings, and short-term. Because commercial property is depreciated over a longer period, annual tax deductions are smaller, making cost segregation especially helpful for commercial property owners.

Standard depreciation schedules treat a building as one asset and follow the IRS’s longest allowed recovery periods, which means smaller deductions each year. Without proper cost segregation, your building and all assets inside would default to a 39-year depreciation timeline.

With a cost segregation study, you get the chance to break things down, analyzing the different parts of your property and assigning costs to each category. This lets you separate the building’s components into the right segments, following specific IRS rules and guidelines for each asset class. If you’re wondering whether cost segregation is a good fit, our advisors can help you evaluate the opportunity, introduce you to our proven study partner if it makes sense for you, and coordinate the tax planning that follows.

Cost Segregation for Residential Properties

Cost segregation is not limited to commercial buildings. Residential rental properties, including multifamily buildings, apartment complexes, single-family rentals, duplexes, and certain short-term rental properties, may also benefit from a study.

While residential rental property is generally depreciated over 27.5 years, a cost segregation study can identify components such as appliances, carpeting, cabinetry, specialty lighting, landscaping, fencing, sidewalks, and other land improvements that may qualify for shorter recovery periods. This can help residential real estate owners accelerate deductions, improve cash flow, and create more flexibility for future renovations, debt reduction, or additional investment.

Tax Benefits and Incentives from Cost Segregation

A cost segregation study can uncover significant tax savings, and the One Big Beautiful Bill Act makes cost segregation more appealing for properties. With permanent 100% bonus depreciation starting Jan. 19, 2025, even smaller properties can deliver significant tax savings in year one.

The Section 179 deduction lets you recover all or part of the cost of certain qualifying property by deducting it in the year you place the property in service, according to the IRS. Section 179 accelerates deductions by allowing you to immediately expense qualifying property up to $2.56 million for 2026, which can be combined with cost segregation for more deductions.

Cost segregation can also positively impact your cash flow. By reducing tax liability in your property’s early years, you can free up capital for reinvestment in your property or to pay down your debt.

While the benefits of cost segregation can be substantial, it’s important to follow the IRS audit technique guides and keep all your documentation in order. Also, keep potential drawbacks in mind. For example, if you sell or dispose of the property, depreciation recapture rules could trigger additional taxes. Passive-activity limitations could also affect how much of your deduction you can use, depending on your personal situation.

To make sure you’re taking full advantage of cost segregation and following the IRS’s rules, it’s smart to work with a qualified tax advisor to navigate the process.

A Three-Phase Approach to Cost Segregation

1. Documentation

During this phase, there’s a building visit where relevant items are documented based on the IRS audit technique guides, including room dimensions, furniture and fixtures, improvements, and other observations.

2. Cost analysis

An analysis is done on the costs associated with each component identified during the documentation phase.

3. Tax analysis

The property segments are analyzed to determine the appropriate depreciable life for the cost associated with each, recalculating current year depreciation under this new accounting method.

Once the study is complete, you receive a property analysis report. Based on IRS guidance and applicable case law, you can capture the maximum depreciation deductions from the date that the property is placed in service.

Eligible Properties and Asset Classification

Wondering if your property qualifies for cost segregation? The strategy covers a wide variety of buildings, including commercial buildings, apartment complexes, and manufacturing facilities. It also covers renovations and improvements like parking lots and landscaping.

Some examples of assets that can be reclassified for faster depreciation include lighting systems, flooring, cabinetry, and certain HVAC components. These are the kinds of items that might not last as long as the building itself, so the IRS allows you to depreciate them over a shorter period.

The IRS has specific guidelines, and tax court cases have set important precedents for how assets should be classified. Basically, anything that’s integral to the building’s structure stays with the standard, longer depreciation period, while items that can be separated out get a shorter one.

Both newly constructed and existing properties can be analyzed for cost segregation benefits. If you own an older building, be prepared to gather a bit more documentation.

Why Clients Choose M&S for Cost Segregation Support

Compliance, accuracy, and coordination are essential when pursuing a cost segregation study. While we don’t do the engineering study in-house, we collaborate with a trusted partner that specializes in this work. Our tax advisory team stays involved before, during, and after the study to help determine whether the opportunity makes sense, connect you with the study provider, review the tax impacts, and incorporate the results into your overall planning.

Because we understand your business and long-term goals, we can help make the process smoother and ensure the study is used as part of a thoughtful tax strategy.

Getting Started with a Cost Segregation Study

To maximize benefits, property owners often consider a cost segregation study soon after construction, acquisition, or renovation, although in some cases retroactive studies can still be valuable. You can set yourself up for success by gathering any relevant documentation, like construction invoices, architectural drawings, depreciation schedules, and building plans you have. Most studies are wrapped up within six to eight weeks, so you won’t have to wait long to see the potential tax benefits.

Work with Mowery & Schoenfeld on Your Cost Segregation Study

Not sure if a cost segregation study makes sense for your property?

Talk with a tax professional about your eligibility and potential tax savings.