Skip to main content
Tax DeductionsTax Planning

A Cost Segregation Study Can Accelerate Your Depreciation Deductions

By January 29, 2020June 11th, 2022No Comments

You purchased several rental properties during the year and are looking for ways to reduce the income generated by the buildings. A cost segregation study may provide the tax benefits you want.

Cost segregation divides real property into its components, some of which may be  depreciated  faster than the normal 27.5 years for residential rental property or 39 years for nonresidential real estate.

When you purchase rental real estate, you typically break it into two assets to calculate depreciation:

  • Land, which is non-depreciable; and
  • Building (residential is 27.5-year property; nonresidential is 39-year property).

With a cost segregation study you allocate the building’s cost to much more than the building and land. The costs are typically classified to the following assets:

  • Land, which is non-depreciable
  • 5-year property
  • 7-year property
  • 15-year property
  • For the remainder, 27.5-year property or 39-year property, depending on building use

Benefits and Drawbacks

The tax benefit derived from a cost segregation study is the front-loading of depreciation deductions, which allows you to deduct them sooner. This results in increased cash flow due to the deferral of income taxes and the ability to invest more money today. A dollar today is worth more than a dollar ten years from now.  Keep in mind, the total depreciation you deduct with or without a cost segregation study will the same amount over the lifetime of the property.

Recent tax law changes increased bonus depreciation from 50 percent to 100 percent and also allows bonus depreciation on qualifying used property. Cost segregation is made to take advantage of these new law changes.

You can also use cost segregation for rental properties you acquired in the past and perform what’s known as a look-back study to claim depreciation for prior years.

If the passive activity loss rules affect your ability to take immediate rental losses, you’ll need to crunch the numbers to determine if you can benefit.

Tax reform eliminated your ability to do a like-kind exchange for non-real property. Therefore, if you perform a cost segregation study and then later use a like-kind exchange on that property, you’ll have taxable gain to report on the assets that’s not land or 27.5-year or 39-year property.

Illustration of a Cost Segregation Study

For purposes of our illustration we used a commercially available cost segregation calculator to demonstrate the benefit of a cost segregation study. This does not replace the need to engage a cost segregation professional to perform the study and provide you with a report supporting the cost allocations.

Assume ABC Properties LLC acquires an office building for $3,750,000 in 2020 with a depreciable basis of $3,000,000.

After entering the details of the property, the calculator allocated the costs as follows:

  • 5-year property: $60,000
  • 7-year property: $270,000
  • 15-year property: $360,000
  • 39-year property: $2,310,000

Based on a 40% combined federal and state tax rate the net present value (using a 6% discount rate) of the taxes deferred for the first five years is $116,700.

A cost segregation study is an excellent tax deferral strategy that should be considered by residential and commercial rental property owners. If you would like to investigate whether a cost segregation study can help your reduce your current taxes and increase your cash flow, please call us at 561-826-9303.

Contact Us 

You deserve the best in IRS tax representation, tax preparation, and tax planning services. At East Coast Tax Consulting Group, you’ll work with a licensed CPA who will handle your case from beginning to end. We invite you to contact our team to schedule a free, confidential consultation.

[gravityforms id="5" title="false" description="false" ajax="true" tabindex="199"]
<script type="text/javascript">var gform;gform||(document.addEventListener("gform_main_scripts_loaded",function(){gform.scriptsLoaded=!0}),window.addEventListener("DOMContentLoaded",function(){gform.domLoaded=!0}),gform={domLoaded:!1,scriptsLoaded:!1,initializeOnLoaded:function(o){gform.domLoaded&&gform.scriptsLoaded?o():!gform.domLoaded&&gform.scriptsLoaded?window.addEventListener("DOMContentLoaded",o):document.addEventListener("gform_main_scripts_loaded",o)},hooks:{action:{},filter:{}},addAction:function(o,n,r,t){gform.addHook("action",o,n,r,t)},addFilter:function(o,n,r,t){gform.addHook("filter",o,n,r,t)},doAction:function(o){gform.doHook("action",o,arguments)},applyFilters:function(o){return gform.doHook("filter",o,arguments)},removeAction:function(o,n){gform.removeHook("action",o,n)},removeFilter:function(o,n,r){gform.removeHook("filter",o,n,r)},addHook:function(o,n,r,t,i){null==gform.hooks[o][n]&&(gform.hooks[o][n]=[]);var e=gform.hooks[o][n];null==i&&(i=n+"_"+e.length),gform.hooks[o][n].push({tag:i,callable:r,priority:t=null==t?10:t})},doHook:function(n,o,r){var t;if(r=Array.prototype.slice.call(r,1),null!=gform.hooks[n][o]&&((o=gform.hooks[n][o]).sort(function(o,n){return o.priority-n.priority}),o.forEach(function(o){"function"!=typeof(t=o.callable)&&(t=window[t]),"action"==n?t.apply(null,r):r[0]=t.apply(null,r)})),"filter"==n)return r[0]},removeHook:function(o,n,t,i){var r;null!=gform.hooks[o][n]&&(r=(r=gform.hooks[o][n]).filter(function(o,n,r){return!!(null!=i&&i!=o.tag||null!=t&&t!=o.priority)}),gform.hooks[o][n]=r)}});</script> <div class='gf_browser_unknown gform_wrapper gform_wrapper_original_id_5 gravity-theme whitepaper-cta-popup_wrapper' id='gform_wrapper_1559891021' ><div id='gf_1559891021' class='gform_anchor' tabindex='-1'></div><form method='post' enctype='multipart/form-data' target='gform_ajax_frame_1559891021' id='gform_1559891021' class='whitepaper-cta-popup' action='/cost-segregation-study-accelerates-depreciation/#gf_1559891021' novalidate> <div class='gform_body gform-body'><div id='gform_fields_1559891021' class='gform_fields top_label form_sublabel_below description_below'><div id="field_5_2" class="gfield gfield_contains_required field_sublabel_below field_description_below hidden_label gfield_visibility_visible" data-js-reload="field_5_2"><label class='gfield_label' for='input_1559891021_2' >First Name<span class="gfield_required"><span class="gfield_required gfield_required_asterisk">*</span></span></label><div class='ginput_container ginput_container_text'><input name='input_2' id='input_1559891021_2' type='text' value='' class='large' tabindex='199' placeholder='First Name' aria-required="true" aria-invalid="false" /> </div></div><div id="field_5_3" class="gfield gfield_contains_required field_sublabel_below field_description_below hidden_label gfield_visibility_visible" data-js-reload="field_5_3"><label class='gfield_label' for='input_1559891021_3' >Last Name<span class="gfield_required"><span class="gfield_required gfield_required_asterisk">*</span></span></label><div class='ginput_container ginput_container_text'><input name='input_3' id='input_1559891021_3' type='text' value='' class='large' tabindex='200' placeholder='Last Name' aria-required="true" aria-invalid="false" /> </div></div><div id="field_5_1" class="gfield gfield_contains_required field_sublabel_below field_description_below hidden_label gfield_visibility_visible" data-js-reload="field_5_1"><label class='gfield_label' for='input_1559891021_1' >Email Address<span class="gfield_required"><span class="gfield_required gfield_required_asterisk">*</span></span></label><div class='ginput_container ginput_container_email'> <input name='input_1' id='input_1559891021_1' type='email' value='' class='large' tabindex='201' placeholder='Email Address' aria-required="true" aria-invalid="false" /> </div></div><div id="field_5_4" class="gfield gform_validation_container field_sublabel_below field_description_below gfield_visibility_visible" data-js-reload="field_5_4"><label class='gfield_label' for='input_1559891021_4' >Email</label><div class='ginput_container'><input name='input_4' id='input_1559891021_4' type='text' value='' autocomplete='new-password'/></div><div class='gfield_description' id='gfield_description_5_4'>This field is for validation purposes and should be left unchanged.</div></div></div></div> <div class='gform_footer top_label'> <button type='submit' onclick='if(window["gf_submitting_1559891021"]){return false;} if( !jQuery("#gform_1559891021")[0].checkValidity || jQuery("#gform_1559891021")[0].checkValidity()){window["gf_submitting_1559891021"]=true;} ' onkeypress='if( event.keyCode == 13 ){ if(window["gf_submitting_1559891021"]){return false;} if( !jQuery("#gform_1559891021")[0].checkValidity || jQuery("#gform_1559891021")[0].checkValidity()){window["gf_submitting_1559891021"]=true;} jQuery("#gform_1559891021").trigger("submit",[true]); }' id='gform_submit_button_1559891021' class='gform_button button om-trigger-conversion'>Submit</button> <input type='hidden' name='gform_ajax' value='form_id=5&amp;title=&amp;description=&amp;tabindex=199' /> <input type='hidden' class='gform_hidden' name='is_submit_5' value='1' /> <input type='hidden' class='gform_hidden' name='gform_submit' value='5' /> <input type='hidden' class='gform_hidden' name='gform_unique_id' value='' /> <input type='hidden' class='gform_hidden' name='state_5' value='WyJbXSIsIjE3OGJjZmUyNjg3ZTQyOGFjZTRkZjMzZjBiOTAzYTRlIl0=' /> <input type='hidden' class='gform_hidden' name='gform_target_page_number_5' id='gform_target_page_number_5' value='0' /> <input type='hidden' class='gform_hidden' name='gform_source_page_number_5' id='gform_source_page_number_5' value='1' /> <input type='hidden' name='gform_random_id' value='1559891021' /><input type='hidden' name='gform_field_values' value='' /> </div> </form> </div> <iframe style='display:none;width:0px;height:0px;' src='about:blank' name='gform_ajax_frame_1559891021' id='gform_ajax_frame_1559891021' title='This iframe contains the logic required to handle Ajax powered Gravity Forms.'></iframe> <script type="text/javascript"> gform.initializeOnLoaded( function() {gformInitSpinner( 1559891021, 'https://www.eastcoasttaxconsulting.com/wp-content/plugins/gravityforms/images/spinner.svg' );jQuery('#gform_ajax_frame_1559891021').on('load',function(){var contents = jQuery(this).contents().find('*').html();var is_postback = contents.indexOf('GF_AJAX_POSTBACK') >= 0;if(!is_postback){return;}var form_content = jQuery(this).contents().find('#gform_wrapper_1559891021');var is_confirmation = jQuery(this).contents().find('#gform_confirmation_wrapper_1559891021').length > 0;var is_redirect = contents.indexOf('gformRedirect(){') >= 0;var is_form = form_content.length > 0 && ! is_redirect && ! is_confirmation;var mt = parseInt(jQuery('html').css('margin-top'), 10) + parseInt(jQuery('body').css('margin-top'), 10) + 100;if(is_form){jQuery('#gform_wrapper_1559891021').html(form_content.html());if(form_content.hasClass('gform_validation_error')){jQuery('#gform_wrapper_1559891021').addClass('gform_validation_error');} else {jQuery('#gform_wrapper_1559891021').removeClass('gform_validation_error');}setTimeout( function() { /* delay the scroll by 50 milliseconds to fix a bug in chrome */ jQuery(document).scrollTop(jQuery('#gform_wrapper_1559891021').offset().top - mt); }, 50 );if(window['gformInitDatepicker']) {gformInitDatepicker();}if(window['gformInitPriceFields']) {gformInitPriceFields();}var current_page = jQuery('#gform_source_page_number_5').val();gformInitSpinner( 1559891021, 'https://www.eastcoasttaxconsulting.com/wp-content/plugins/gravityforms/images/spinner.svg' );jQuery(document).trigger('gform_page_loaded', [1559891021, current_page]);window['gf_submitting_1559891021'] = false;}else if(!is_redirect){var confirmation_content = jQuery(this).contents().find('.GF_AJAX_POSTBACK').html();if(!confirmation_content){confirmation_content = contents;}setTimeout(function(){jQuery('#gform_wrapper_1559891021').replaceWith(confirmation_content);jQuery(document).scrollTop(jQuery('#gf_1559891021').offset().top - mt);jQuery(document).trigger('gform_confirmation_loaded', [1559891021]);window['gf_submitting_1559891021'] = false;wp.a11y.speak(jQuery('#gform_confirmation_message_1559891021').text());}, 50);}else{jQuery('#gform_1559891021').append(contents);if(window['gformRedirect']) {gformRedirect();}}jQuery(document).trigger('gform_post_render', [1559891021, current_page]);} );} ); </script>
[gravityforms id="5" title="false" description="false" ajax="true" tabindex="199"]
<div class='gf_browser_unknown gform_wrapper gform_wrapper_original_id_5 gravity-theme whitepaper-cta-popup_wrapper' id='gform_wrapper_903551118' ><div id='gf_903551118' class='gform_anchor' tabindex='-1'></div><form method='post' enctype='multipart/form-data' target='gform_ajax_frame_903551118' id='gform_903551118' class='whitepaper-cta-popup' action='/cost-segregation-study-accelerates-depreciation/#gf_903551118' novalidate> <div class='gform_body gform-body'><div id='gform_fields_903551118' class='gform_fields top_label form_sublabel_below description_below'><div id="field_5_2" class="gfield gfield_contains_required field_sublabel_below field_description_below hidden_label gfield_visibility_visible" data-js-reload="field_5_2"><label class='gfield_label' for='input_903551118_2' >First Name<span class="gfield_required"><span class="gfield_required gfield_required_asterisk">*</span></span></label><div class='ginput_container ginput_container_text'><input name='input_2' id='input_903551118_2' type='text' value='' class='large' tabindex='199' placeholder='First Name' aria-required="true" aria-invalid="false" /> </div></div><div id="field_5_3" class="gfield gfield_contains_required field_sublabel_below field_description_below hidden_label gfield_visibility_visible" data-js-reload="field_5_3"><label class='gfield_label' for='input_903551118_3' >Last Name<span class="gfield_required"><span class="gfield_required gfield_required_asterisk">*</span></span></label><div class='ginput_container ginput_container_text'><input name='input_3' id='input_903551118_3' type='text' value='' class='large' tabindex='200' placeholder='Last Name' aria-required="true" aria-invalid="false" /> </div></div><div id="field_5_1" class="gfield gfield_contains_required field_sublabel_below field_description_below hidden_label gfield_visibility_visible" data-js-reload="field_5_1"><label class='gfield_label' for='input_903551118_1' >Email Address<span class="gfield_required"><span class="gfield_required gfield_required_asterisk">*</span></span></label><div class='ginput_container ginput_container_email'> <input name='input_1' id='input_903551118_1' type='email' value='' class='large' tabindex='201' placeholder='Email Address' aria-required="true" aria-invalid="false" /> </div></div><div id="field_5_4" class="gfield gform_validation_container field_sublabel_below field_description_below gfield_visibility_visible" data-js-reload="field_5_4"><label class='gfield_label' for='input_903551118_4' >Phone</label><div class='ginput_container'><input name='input_4' id='input_903551118_4' type='text' value='' autocomplete='new-password'/></div><div class='gfield_description' id='gfield_description_5_4'>This field is for validation purposes and should be left unchanged.</div></div></div></div> <div class='gform_footer top_label'> <button type='submit' onclick='if(window["gf_submitting_903551118"]){return false;} if( !jQuery("#gform_903551118")[0].checkValidity || jQuery("#gform_903551118")[0].checkValidity()){window["gf_submitting_903551118"]=true;} ' onkeypress='if( event.keyCode == 13 ){ if(window["gf_submitting_903551118"]){return false;} if( !jQuery("#gform_903551118")[0].checkValidity || jQuery("#gform_903551118")[0].checkValidity()){window["gf_submitting_903551118"]=true;} jQuery("#gform_903551118").trigger("submit",[true]); }' id='gform_submit_button_903551118' class='gform_button button om-trigger-conversion'>Submit</button> <input type='hidden' name='gform_ajax' value='form_id=5&amp;title=&amp;description=&amp;tabindex=199' /> <input type='hidden' class='gform_hidden' name='is_submit_5' value='1' /> <input type='hidden' class='gform_hidden' name='gform_submit' value='5' /> <input type='hidden' class='gform_hidden' name='gform_unique_id' value='' /> <input type='hidden' class='gform_hidden' name='state_5' value='WyJbXSIsIjE3OGJjZmUyNjg3ZTQyOGFjZTRkZjMzZjBiOTAzYTRlIl0=' /> <input type='hidden' class='gform_hidden' name='gform_target_page_number_5' id='gform_target_page_number_5' value='0' /> <input type='hidden' class='gform_hidden' name='gform_source_page_number_5' id='gform_source_page_number_5' value='1' /> <input type='hidden' name='gform_random_id' value='903551118' /><input type='hidden' name='gform_field_values' value='' /> </div> </form> </div> <iframe style='display:none;width:0px;height:0px;' src='about:blank' name='gform_ajax_frame_903551118' id='gform_ajax_frame_903551118' title='This iframe contains the logic required to handle Ajax powered Gravity Forms.'></iframe> <script type="text/javascript"> gform.initializeOnLoaded( function() {gformInitSpinner( 903551118, 'https://www.eastcoasttaxconsulting.com/wp-content/plugins/gravityforms/images/spinner.svg' );jQuery('#gform_ajax_frame_903551118').on('load',function(){var contents = jQuery(this).contents().find('*').html();var is_postback = contents.indexOf('GF_AJAX_POSTBACK') >= 0;if(!is_postback){return;}var form_content = jQuery(this).contents().find('#gform_wrapper_903551118');var is_confirmation = jQuery(this).contents().find('#gform_confirmation_wrapper_903551118').length > 0;var is_redirect = contents.indexOf('gformRedirect(){') >= 0;var is_form = form_content.length > 0 && ! is_redirect && ! is_confirmation;var mt = parseInt(jQuery('html').css('margin-top'), 10) + parseInt(jQuery('body').css('margin-top'), 10) + 100;if(is_form){jQuery('#gform_wrapper_903551118').html(form_content.html());if(form_content.hasClass('gform_validation_error')){jQuery('#gform_wrapper_903551118').addClass('gform_validation_error');} else {jQuery('#gform_wrapper_903551118').removeClass('gform_validation_error');}setTimeout( function() { /* delay the scroll by 50 milliseconds to fix a bug in chrome */ jQuery(document).scrollTop(jQuery('#gform_wrapper_903551118').offset().top - mt); }, 50 );if(window['gformInitDatepicker']) {gformInitDatepicker();}if(window['gformInitPriceFields']) {gformInitPriceFields();}var current_page = jQuery('#gform_source_page_number_5').val();gformInitSpinner( 903551118, 'https://www.eastcoasttaxconsulting.com/wp-content/plugins/gravityforms/images/spinner.svg' );jQuery(document).trigger('gform_page_loaded', [903551118, current_page]);window['gf_submitting_903551118'] = false;}else if(!is_redirect){var confirmation_content = jQuery(this).contents().find('.GF_AJAX_POSTBACK').html();if(!confirmation_content){confirmation_content = contents;}setTimeout(function(){jQuery('#gform_wrapper_903551118').replaceWith(confirmation_content);jQuery(document).scrollTop(jQuery('#gf_903551118').offset().top - mt);jQuery(document).trigger('gform_confirmation_loaded', [903551118]);window['gf_submitting_903551118'] = false;wp.a11y.speak(jQuery('#gform_confirmation_message_903551118').text());}, 50);}else{jQuery('#gform_903551118').append(contents);if(window['gformRedirect']) {gformRedirect();}}jQuery(document).trigger('gform_post_render', [903551118, current_page]);} );} ); </script>