Boost Your Bottom Line with Strategic Cost Segregation

If you own residential or commercial real estate, cost segregation could be the tax strategy that puts more money in your pocket.

Cost segregation is a proactive tax planning technique that accelerates depreciation deductions and defers federal income tax. Typically, buildings are depreciated over 27.5 or 39 years, depending on their classification. This standard straight-line depreciation results in relatively small deductions each year.

However, cost segregation allows you to reclassify portions of your building into shorter-life asset categories, unlocking faster depreciation and greater upfront tax savings. It’s commonly used when acquiring, constructing, or renovating a property — and can even be applied retroactively for past-year benefits without the need to amend prior returns.

Additionally, a cost segregation study can maximize future deductions. When components are replaced later, the study helps you identify their original costs, making it easier to write them off.

What Exactly Is Cost Segregation?

A cost segregation study is an in-depth analysis conducted by a qualified professional who inspects your property, estimates the value of its components, and assigns them to the correct tax categories.

This engineering-based analysis reviews the costs of constructing, acquiring, or renovating a commercial or residential rental property and breaks those costs into separate asset classes. The goal is to identify which parts can be depreciated over shorter periods, allowing you to claim larger deductions sooner.

Cost segregation can be applied to nearly all types of commercial buildings, including:

• Retail centers and strip malls

• Hotels, motels, and restaurants

• Banks and office buildings

• Medical practices and warehouses

• Auto dealerships, manufacturing plants, and more

It also applies to residential rental properties, whether single-family homes, apartment complexes, townhomes, or affordable housing units.

How Does Cost Segregation Work?

For tax purposes in the U.S., commercial properties are typically depreciated over 39 years and residential rentals over 27.5 years using a straight-line method. That means owners receive a slow, steady deduction each year for the property's wear and tear.

Cost segregation accelerates this process by separating out personal property and land improvements — such as lighting, carpet, landscaping, and certain fixtures — which can be depreciated over 5, 7, or 15 years using accelerated methods.

These components may also qualify for bonus depreciation, potentially allowing you to fully deduct their cost in the first year. This results in a significant upfront deduction, increased first-year cash flow, and the ability to reinvest that cash in other opportunities.

What Are the Benefits?

How much can you save? That depends on your property type and cost breakdown. At One Call Financial, our cost segregation studies are performed by a team of experienced engineers and CPAs. We ensure accuracy, maximize your savings, and provide thorough documentation to satisfy IRS requirements.

As a general benchmark:
For every $1 million shifted from 39-year to 5-year depreciation, the net present value savings can be around $200,000, with a potential cash flow boost of $330,000 in the first five years alone.