If you own commercial or residential rental property, cost segregation could be the key to significantly reducing your tax liability. By breaking down the components of a building and depreciating them over shorter time periods, cost segregation allows real estate investors to increase cash flow, defer taxes, and maximize deductions. Here’s how it works and why you should consider it.
1. What is Cost Segregation?
Cost segregation is a tax strategy that allows property owners to reclassify certain building components into shorter depreciation schedules. Instead of depreciating an entire property over 27.5 years (residential) or 39 years (commercial), cost segregation identifies portions that can be depreciated over 5, 7, or 15 years. This accelerates deductions and provides immediate tax benefits.
Eligible Property Types:
- Apartment buildings
- Commercial office buildings
- Retail properties
- Industrial facilities
- Hotels and resorts
- Self-storage units
Key Benefits:
- Larger upfront tax deductions
- Increased cash flow for reinvestment
- Defers taxes, freeing up capital for business growth
2. How Cost Segregation Works
A cost segregation study is conducted by specialized tax professionals who analyze your property and break down its components into different depreciation categories. Here’s how it works:
Step 1: Property Analysis – Engineers and tax specialists inspect the property and identify components eligible for accelerated depreciation.
Step 2: Asset Classification – Items like flooring, lighting, electrical systems, HVAC, and landscaping are assigned shorter depreciation lifespans.
Step 3: Tax Report & Filing – The findings are compiled into a report, allowing the owner to claim increased depreciation deductions in the current year.
Example: A $5 million commercial property depreciated over 39 years would typically yield $128,000 in annual deductions. With cost segregation, 30% of the property ($1.5 million) could be reclassified to 5- and 15-year schedules, resulting in an extra $300,000+ in deductions in year one alone!
3. Who Benefits Most from Cost Segregation?
Real Estate Investors & Developers – Reduces taxable income and improves investment ROI.
Business Owners with Commercial Property – Increases cash flow while maintaining operational liquidity.
High-Net-Worth Individuals – Provides major tax deferrals for wealth-building strategies.
Who Shouldn’t Use Cost Segregation?
- Those planning to sell within a few years (as it may trigger depreciation recapture taxes).
- Small-scale investors without substantial tax burdens.
4. Bonus Depreciation & Cost Segregation
With bonus depreciation currently at 40% in 2025, cost segregation studies can supercharge tax savings. Property owners can immediately deduct 40% of qualified property costs in the first year, making this an ideal time to conduct a study.
Pro Tip: The bonus depreciation percentage is phasing out in future years, so acting now ensures maximum tax advantages.
5. How to Get Started with Cost Segregation
Step 1: Determine if your property qualifies.
Step 2: Work with a specialized tax strategist to conduct a cost segregation study.
Step 3: File your updated depreciation schedule and claim your tax savings.
Maximize your real estate tax benefits today! At Neil Jesani Advisors, we specialize in cost segregation studies and advanced tax planning strategies for high-net-worth investors and business owners. Schedule a consultation now to unlock your biggest tax savings!
