How does a property qualify for cost segregation?

Cost segregation is a highly beneficial tax planning strategy utilized by real estate investment companies to accelerate depreciation deductions, defer tax and improve cash flow.  Cost segregation studies can benefit taxpayers who purchase, construct, expand, or renovate real estate property.  A study can take the cost of each component of a qualifying real estate investment and reclassify and break it down among shorter recovery periods; in turn, you can accelerate depreciation, uncover missed deductions, reduce tax liability, and increase cash flow. Accessing these benefits may be challenging without the help of a cost segregation study.

Benefits of a Cost Segregation Study

  • Increase in cash flow
  • Reduction in current tax liability
  • Deferral of Federal Income Taxes
  • Ability to recapture past years

Does Your Property Qualify For Cost Segregation?

Any type of a commercial property placed into service after 1986 qualifies for cost segregation. Typically properties with a depreciable basis of $500,000 or more are good candidates from a cost / benefit point of view. Most developed commercial real estate that meets the following minimum guidelines qualify for cost segregation:

  • Real property acquired, built or significantly remodeled after 1986
  • Commercial for profit venture
  • Depreciable basis of at least $500,000


Cost segregation studies are not right for everyone. They are typically used by commercial real estate investors or rental property owners with significant real estate activity that would benefit from a notable reduction in their federal income tax rate.

Thus, With cost segregation, you can reclassify a portion of your assets as personal property instead of real estate property in order to depreciate them on a much for tax purposes. This lessens your tax burden, thereby leaving you with more profit. 

Before you decide to buy property, it’s a good idea to talk to your tax professional to be sure you’re making the right move for your business.


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