Cost Segregation

Cost segregation is a tax planning strategy that allows real estate owners to accelerate the depreciation of their properties, which can reduce their taxable income and increase their cash flow.

How cost segregation works

When you purchase or construct a real estate property, the cost of the property is spread out over a period of time, typically 27.5 years for residential properties and 39 years for commercial properties. This is called depreciation.

However, some of the components of a real estate property may have shorter useful lives than the overall property. For example, carpet, lighting fixtures, and HVAC systems may have 5, 7, or 15 years of useful life.

A cost segregation study identifies these shorter-lived components and allows you to depreciate them over their shorter useful lives. This can result in significant tax savings, especially in the early years of ownership.

Learn more about Cost Segregation Audit Technique Guide – irs.gov.