Cost Segregation Study

June 12, 2023

If you invest in real estate, then you will want to consider using cost segregation as a tax savings strategy. In this guide, we cover frequently asked questions about cost segregation studies, including what they are, who they are for, and how they help save money on federal and state income taxes. Keep reading for details. 

What Is Cost Segregation? 

Cost segregation is a tax planning tool that divides real property into different depreciable categories. The purpose of a cost segregation study is to help the taxpayer maximize tax deductions for his or her investment property. Cost segregation can speed up the standard depreciation schedule for residential or commercial real estate, giving the taxpayer an opportunity for a greater annual deduction on federal and state income taxes, and thereby increasing cash flow for other purchases or investments. A cost segregation study is conducted by financial firms specializing in accounting and tax law, engineering, and construction. 

How Does a Cost Segregation Study Work? 

The firm you work with for a cost segregation study will first conduct a feasibility analysis. A team of experts will take a detailed look at your investment property, including plumbing, electrical, flooring, appliances, landscaping, parking lots, sidewalks, and much more. Whereas your residential or commercial building structure is subject to either a 27.5 year- or 39-year depreciation schedule, many of its individual components, such as the above mentioned systems or sections, can be depreciated over 5, 7, or 15 years.

The goal of the cost segregation study is to appropriately categorize all of the components that can be depreciated on an expedited schedule, thus saving you money. 

How Much Does a Cost Segregation Study Cost? 

A cost segregation study may cost you $5,000 to $15,000 to complete, depending on the size of the property and how much documentation you provide. This may sound like a lot of money, but your annual return on investment will likely justify the expense. In many cases, a cost segregation study is well worth the money. 

How Long Does a Cost Segregation Study Take? 

A cost segregation study typically takes up to two months to complete. It takes time to investigate the property, review the proper documentation, categorize depreciable items, and determine how much of a tax deduction can be taken on an accelerated depreciation schedule. Patience is key. 

Who Can Benefit from Cost Segregation?

Have you purchased or built investment real estate property in the past fifteen years? If so, you can benefit from a cost segregation study. Your investment property can be either residential, such as a single- or multi-family home that you rent out, or commercial, such as a childcare facility, office building, or retail center. Note that your place of primary residence does not qualify for cost segregation. 

Who to Work with for a Cost Segregation Study

Technically, you can conduct a cost segregation study on your own, but we don’t recommend it. The IRS has lots of rules about analyzing properties for depreciable assets and categorizing items according to the appropriate depreciation schedules. For this reason, we recommend working with a financial firm that specializes in cost segregation. You need to work with experts in accounting and tax law, as well as engineering specialists, so choose your professional team wisely. 

Remember, a cost segregation study may be an upfront expense, but if you own residential or commercial real estate, you may greatly benefit from the annual cost savings on your federal and state income taxes that cost segregation can provide. 

Honest Buck Accounting offers a wide range of accounting services and financial expertise for Early Childhood Education businesses. To learn more about how we can help you save money on taxes and grow a more profitable childcare business, reach out to our team of experts. Contact us today. 

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