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What Is Cost Segregation?

Written By: MB Group

Are you an individual or business who owns real estate? If so, you may be eligible to use the cost segregation tax planning strategy. In the simplest sense, cost segregation is a process where certain parts of leased or owned real estate are reclassified to optimize depreciation.  Previously reserved for use by the nation's largest real estate owners and the major accounting firms, cost segregation has now become a go-to tax planning strategy for real estate owners and properties of all sizes. Let's take a closer look at cost segregation. 

What Is Cost Segregation?

Cost segregation is an attractively-feasible tax planning strategy used by businesses, real estate owners, and even tenants to defer taxes, accelerate depreciation deductions, and improve cash flows. Properties that are eligible for cost segregation include structures that have been purchased, renovated, or constructed since 1987.

What Is a Cost Segregation Study?

When you purchase a property, it includes the building structure, exterior components, and all interior cost segregationcomponents. On average, however, anywhere from 20% to 40% of the components will fall into a tax category that can be written offer faster than the actual building structure. The Cost Segregation Study carefully dissects the purchase price or construction cost of the property that would be otherwise depreciated over 39 or 27 ½ years

The overarching goal is to accurately identify all costs related to the property that can be depreciated over 15, seven, and five years. For instance, electrical outlets that are dedicated to certain equipment like computers and appliances can be depreciated over five years. 

When Is the Most Ideal Time to Conduct a Cost Segregation Study?

The most opportune time to conduct a cost segregation study is the year the property was placed in service. Whether it's an acquisition, remodel, or new construction, you'll realize the most benefits and maximize your deductions from year one. 

Who Qualifies for Cost Segregation?

In general, any commercial real estate of any size placed in service after 1986 can qualify for a cost segregation study, such as: 

Apartment Buildings 

Manufacturing facilities

Distribution Centers

Gas stations

Car dealerships 

Auto repair facilities

Nursing homes

Office buildings

Truck terminals




Childcare facilities




While any type of business can use cost segregation, the cost of the analysis can prevent properties in lower value from being the most suitable candidates. In most instances, cost segregation begins to make real sense for real estate with a depreciable cost basis of at least $1 million. At the same time, the study typically makes financial sense for:

    • Businesses who have interior renovation more than $200,000
    • Companies that make repairs or renovate frequently
    • Companies that have substantial fixed asset schedules.

What Are the Benefits of Cost Segregation? 

cost segregation studyThere are a range of advantages associated with cost segregation. The key benefit, however, is improved cash flow, which is typically achieved through the acceleration of deductions associated with depreciation and the tax deferral that results. In addition to the accelerated depreciation impact, cost segregation commonly yields:

    • Savings on property taxes
    • Estimated quarterly tax payment reduction
    • Savings on transfer tax
    • Increased depreciation in the earlier years
    • Facilitates future write-offs once structural components are replaced
    • Generates losses so you're able to carry back or carry forward as needed

And when it's properly prepared, your cost segregation study can be utilized as a powerful asset management tool. In the end, cost segregation is an analysis that can be inexpensive when compared to the ultimate savings. 

Contact MB Group Today 

At MB Group, we use cost segregation studies to help our clients implement tax planning strategies. We partner with providers to ensure all tax ramifications are considered, particularly pertaining to: 

  • Issues of recapture
  • The intricate steps involved with 1031 exchanges
  • Passive activity limitations

If you have questions about cost segregation and how it can help you achieve your goals, don't hesitate to contact the MB Group today. 

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Tags: Real Estate tax planning

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