Property owners that build remodel, expand, or purchase a facility often overlook cost segregation provisions that could help defer federal and state incomes taxes—and avoid paying taxes sooner than required.
Cost segregation is a tax-deferral strategy that frontloads depreciation deductions into the early years of facility ownership. Segregating the cost components of your buildings into the proper asset classifications and recovery periods could result in significantly shorter tax lives of five, seven, and 15-year spans—rather than standard 27.5 or 39-year depreciation periods.
Deferring taxes with these strategies could help put cash back into your business so you can focus on the business goals that matter most to you.
Cost Segregation Opportunities
Businesses in the real estate, retail, restaurant, manufacturing, automotive dealerships, and health care industries can potentially benefit the most from cost segregation studies.
Studies can generally be performed for:
- Ground-up new construction
- Purchased properties
- Remodel or expansion
- Leasehold improvements, paid by tenant or landlord
Your facilities could benefit from a study if they:
- Have a depreciable basis of at least $1 million or leasehold improvements of greater than $300,000
- Have been placed in service or undergone improvements any time since 1987
Common Reclassification Percentages
Cost Segregation Example
- Facility: Newly constructed commercial office building with a cost basis of $5 million placed into service in 2022.
- Cost Segregation Study Finding: $1 million in property identified to reclassify for shorter depreciable lives.
- Change: First five years of ownership depreciation increases $875,000 compared to the standard depreciation without a study.
- Long-Term Benefit: $260,000 tax deferral over the first five years of ownership.
- Net Present Value of Tax Deferral: $190,000 based on a 7% rate of return.
Benefits of a Cost Segregation Study