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When to Consider a Cost Segregation Study

January 10, 2023

by Heidi Lellman, CPA

A cost segregation study can be an effective way to accelerate depreciation and maximize tax savings within your real estate portfolio. Typically, these studies “parcel out” certain building assets and reclassify them into shorter depreciation periods. The goal is to immediately reduce your taxable income, so you have more cash available for future endeavors.

Not every real estate owner will benefit from a cost segregation study. If your total length of ownership was less than one year, are planning to sell soon, can’t take losses from ownership, or aren’t able to reinvest the newly available cash, it’s unlikely you’ll see benefits.

Cost segregation studies can also be costly. Before you embark on one, it’s important to make sure you’ll see a benefit.

Typically, the consultant conducting your cost segregation study will run a cost-benefit analysis to make sure it’s worth your while. To help you better understand when to consider a study, here are a few situations in which you could reap benefits.

During the initial concept design and project planning

Yes, we’re talking before construction even begins. Being strategic about your choice of materials and the ways in which you incorporate energy-efficient improvements could lead to enhanced depreciation deductions. A cost segregation study can help you understand where you’ll get the most bang for your buck.

When you acquire or renovate a building

Conducting a cost segregation study as soon as possible lets you optimize your tax savings from day one. Certain elements of the study can even serve as a foundation for future tax savings opportunities, allowing you to reap benefits over the long term.

Within five years of acquiring a building

Maybe you were unable to take a loss during the first year you owned the building, or you only recently became an involved partner. The good news is you don’t have to conduct a cost segregation study on the first day of ownership to benefit.

If you’ve owned the building for fewer than five years, a cost segregation study could still lead to substantial tax savings. That said, if you’ve owned the building for 15+ years, it may be too late for you to see benefits.

Before you make renovations, additions, or improvements

A cost segregation study allows you to retire certain assets you renovate. For example, say your structural, electrical, and building envelope elements depreciate over 27.5 years. But if you were to “carve out” the roof in your cost segregation study and replace it, you could dispose of (or retire?) what’s left of the old. The result: you get to take a write-off while putting a new renovation on the books.

Could you benefit from a cost segregation study?

If you’re thinking about purchasing a building or have recently acquired one, or if your ownership involvement has changed, let us know. We can help you connect with a cost segregation consultant, coordinate the study for you, and even be on site (on your behalf) if needed. Lookback studies require additional reporting with the IRS, so that’s something we can take care as well.

We’ll advise you from a planning perspective, so you know when a cost segregation study could make the most difference for you. If you could benefit from having cash on hand to reinvest in other projects and/or could take advantage of the losses, contact us to discuss.


Meet the Expert

Heidi Lellman, CPA, MBA

Heidi puts her problem-solving skills to use every day to help her clients find creative solutions.   

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