Cost Segregation

Cost segregation is a tax planning strategy that involves identifying and reclassifying certain assets within a commercial property to accelerate depreciation and reduce tax liability.

Under the US tax code, commercial property owners can depreciate their assets over a set period, typically 27.5 years for residential property and 39 years for commercial property. However, not all assets within a property have the same depreciation period. Cost segregation allows property owners to separate assets into shorter-lived categories, such as furniture, fixtures, and equipment, that have a shorter depreciation period, typically five, seven, or 15 years.

By reclassifying assets into shorter-lived categories, property owners can accelerate depreciation and reduce their tax liability. This is because shorter-lived assets can be depreciated more quickly, allowing property owners to claim larger tax deductions in the early years of ownership.

The cost segregation process typically involves a detailed engineering study of the property to identify and allocate the costs of assets to different categories. The study may involve reviewing blueprints, construction drawings, and invoices to determine the cost of assets.

Overall, cost segregation can be a powerful tax planning strategy for commercial property owners, especially those who have recently acquired or built a property. However, it is essential to work with a qualified tax professional and conduct a cost-benefit analysis to determine if cost segregation makes sense for your particular situation.