Cost Segregation Study

Cost Segregation Services

Confident realtor presenting commercial property to potential investors in office building. Professional business people discussing opportunities, analyzing investment potential and location benefits.

If you own commercial real estate, the IRS usually expects you to spread out your tax savings over 39 years. But there’s an opportunity to break down your property into smaller parts — for example, equipment — that can be written off much faster. This gives you bigger tax deductions sooner, putting more money in your pocket right away. Plus, many of these reclassified items qualify for extra tax benefits called “bonus depreciation,” making your savings even greater. To make the most of this, you need to plan carefully and understand the rules.

Our tax advisors know all the ins and outs of property depreciation and the different methods that can be used, and we team up with engineering experts to take a close look at your building. Together, we’ll figure out which parts of your property can be written off faster, helping you make bigger deductions and freeing up your cash flow.

Cost segregation studies are ideal for commercial real estate owners, real estate investors, developers, and businesses that own or improve property, including office buildings, industrial facilities, retail centers, healthcare facilities, and multifamily properties.

Insights

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 depreciation allows those parts to be deducted faster, helping owners increase their current cash flow with an immediate tax benefit.

The IRS classifies properties based on how they’re used and where the income comes from. Rental properties that earn at least 80% of their income from living spaces qualify as residential property and are depreciated over 27.5 years. This includes apartment buildings, single-family rentals, and duplexes mainly used for housing.

Commercial property includes offices, retail stores, warehouses, and mixed‑use buildings that don’t meet the residential rules. Short‑term rentals run like hotels are also considered commercial. 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. If you don’t take a closer look, your building and everything inside it could end up being lumped together as one big asset, using the longest 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. If you’re wondering whether cost segregation is a good fit for your situation, our advisors can walk you through your options and help you decide what makes the most sense for you.

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 lets you 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 schedule, 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 and accuracy are essential when doing a cost segregation study to avoid headaches like audits. Our tax advisory team is well versed in depreciation rules and works closely with engineering experts to make sure everything is accurate. We’ve supported the completion of dozens of detailed studies with minimal disruption for our clients.

Also, because we bring together specialists from our different service lines, you get personalized attention, a custom analysis of your property, and ongoing communication that fits your needs — making integrated planning easier and maximizing your tax benefits.

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 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.