Cost Segregation: Is This Strategy for You?

Written by Coach Janelle CPA on July 6, 2024

One significant tax benefit of owning residential rental property or non-residential commercial or investment property is depreciation—a deduction you get without spending any additional money.

But regular depreciation for real property is slow. Residential rental property is depreciated over 27.5 years and non-residential property over 39 years, providing a relatively small deduction each year.

Fortunately, there is a way you can speed up your depreciation deductions—especially during the first year or years you own the property: cost segregation.

“Cost segregation” is the technical term for separately depreciating the elements of property that are not real property. These are elements other than land, buildings, and building components. They include:

     - improvements made to the land, such as landscaping, swimming pools, paved parking areas, and

 fences; and

     - personal property items inside a building that are not building components—for example, refrigerators,

 stoves, dishwashers, and carpeting in residential rentals.

Using cost segregation does not increase a property owner’s total depreciation deductions, but it does accelerate them over the first few years because personal property has a five- or seven-year depreciation period and land improvements a 15-year period.

In addition, by using bonus depreciation and/or Section 179 expensing, owners can deduct all or most of the cost of personal property and land improvements the first year they own the property—providing a potentially enormous first-year deduction.

A cost segregation study must be conducted to identify which building elements are personal property and land improvements and then to determine their depreciable basis. Studies can be conducted by engineers or done more cheaply with other methods that the IRS views as less reliable.

Cost segregation may not be advisable for every property owner—for example, where it results in a loss that can’t be deducted due to the passive loss rules, or where the owner intends to sell the property within a few years and has to recapture as ordinary income the cost-segregated depreciation deductions.

The best time to perform a cost segregation study is the same year you buy, build, or remodel your real property. But you can wait until a future year—perhaps when you have enough rental or other passive income to use the speeded-up depreciation deductions. 

Are you a property owner looking to maximize your tax benefits and enhance your investment returns? Coach Janelle’s expert tax strategy planning services are here to help you navigate the complexities of cost segregation and other powerful tax strategies.

Don’t Miss Out:

The best time to act is now! Whether you’ve just purchased, built, or remodeled your property, or are planning to in the future, Coach Janelle can help you make the right moves to enhance your financial performance.

Contact Coach Janelle Today!

Unlock the hidden potential of your property investments and start saving big on your taxes. Schedule a consultation with Coach Janelle and discover how her tax strategy planning services can transform your financial outlook.

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