Cost Segregation Studies: How Real Estate Investors Accelerate Depreciation

Cost segregation is one of the most underused tax strategies available to real estate investors. A properly executed cost segregation study can generate tens of thousands of dollars in accelerated depreciation deductions in the first year of ownership alone.

How Depreciation Works

When you purchase an investment property, the IRS allows you to deduct the cost of the building over time — 27.5 years for residential property, 39 years for commercial. Cost segregation accelerates this by breaking the property into components that qualify for 5-, 7-, or 15-year depreciation periods.

What Qualifies for Shorter Lives

• 5-year property: Carpeting, certain fixtures, appliances, some electrical components
• 7-year property: Office furniture and equipment
• 15-year property: Land improvements — parking lots, landscaping, sidewalks, fencing, outdoor lighting

Bonus Depreciation

The Tax Cuts and Jobs Act of 2017 allowed 100% bonus depreciation on qualifying property, meaning assets reclassified to shorter lives could be fully expensed in year one. Bonus depreciation has been phasing down since 2023. Even at reduced percentages, the front-loading of deductions creates substantial cash flow advantages.

A Real-World Example

You purchase a commercial building for $2 million. A cost segregation study identifies $400,000 in components qualifying for 5- and 15-year depreciation. With bonus depreciation at 60%, you can deduct $240,000 in year one. At a 37% federal tax bracket, that’s approximately $88,800 in federal tax savings in year one alone.

Who Benefits Most

• Properties purchased or constructed for $500,000 or more
• Investors with significant taxable income
• Investors who qualify as Real Estate Professionals
• Commercial property owners
• Investors who recently purchased — or those with prior-year properties through a look-back study

How to Get a Study Done

Cost segregation studies should be performed by qualified engineering-based tax firms. Study costs typically range from $5,000–$15,000 for a full engineering study. The ROI on a properly targeted study is almost always substantial — frequently a factor of ten or more in the first year. Review the results with your CPA before filing.