TAX HIGHLIGHT
Capture These Tax Benefits With Cost Segregation
If you acquire nonresidential real property or residential rental property, you may have an opportunity to reduce the depreciable lives on these assets with cost segregation, which could not only lower your tax bill over time but also help increase your cash flow.
Our business tax pros break down cost segregation in these FAQs to ensure you maximize its tax benefits.
What is cost segregation?
Cost segregation allows taxpayers the opportunity to accelerate depreciation deductions for their residential rental property and / or commercial buildings. Typically, commercial building spaces are depreciated over 39 years, while residential rental properties are depreciated over 27.5 years. Under IRS cost segregation guidelines, a significant portion of building and / or land improvements costs can be depreciated over much shorter periods – usually five, seven or 15 years.
To determine your potential tax benefit, have a cost segregation study conducted. With a cost segregation study, specialized pros can evaluate each property element and identify costs for qualifying building components to accelerate depreciation expenses.
When should a cost segregation study be conducted?
Ideally, a cost segregation study is completed prior to beginning construction, however, there are additional applications for this strategy that apply to various stages of real estate ownership and development, including:
• New construction
• Soon-to-be constructed buildings
• Existing properties
• Acquisitions
• Renovated and / or remodeled buildings
• Redevelopment
• Leasehold improvement
A cost segregation study can be completed after a building is placed in service. If you’ re in the process of buying a property, the sales price can be allocated between real and personal property in the sales contract.
How do I file for cost segregation?
The change to the depreciation lives requires either an amended return or an accounting method change( if it is two or more years after the property is acquired or placed in service). To file a change in method of accounting, you’ ll need to file Form 3115. IRS reporting includes the change of basis, depreciable lives and any adjustments for the impact of the depreciation acceleration from the date the assets are placed in service to the year of the method change.
08 | VIEWPOINTS: ISSUE 1 2025