Identify property components.
The study allocates eligible portions of the property's cost to appropriate asset categories and recovery periods.
Cost Segregation
Could cost segregation improve your property’s cash flow?
Cost segregation identifies parts of your property that may qualify for faster depreciation, potentially allowing you to deduct those costs sooner.
I help you evaluate whether a study makes sense for your property and how the potential benefits fit into your broader tax strategy.
You'll work directly with me throughout the process.
Evan O'Brien, CPA, MBA · Former Bank CFO & Chief Investment Officer · 13 Years in Finance
I typically respond within one business day.
When cost segregation may be worth considering
You recently purchased or constructed investment real estate.
Instead of depreciating most of the property over 27.5 or 39 years, certain components may qualify for shorter depreciation periods.
You already own a property and haven't completed a cost segregation study.
Cost segregation isn't necessarily limited to the year you purchase a property. Depending on your circumstances, there may be opportunities to identify previously missed depreciation without amending prior-year returns.
You expect significant taxable income.
Accelerating depreciation may be particularly valuable when deductions can offset income that would otherwise be subject to tax. Whether you can currently use those deductions depends on your individual tax situation.
You're considering buying an investment property.
Understanding the potential depreciation benefits before an acquisition can help you evaluate the property's after-tax economics and incorporate taxes into your investment decision.
You've heard about cost segregation but aren't sure whether the numbers make sense.
Not every property needs a study. I can help you evaluate the potential benefit, cost, timing, and broader tax implications before moving forward.
What your cost segregation study provides.
A cost segregation study analyzes a property and identifies components that may qualify for depreciation over shorter recovery periods than the building itself.
Depending on the property, this can include certain finishes, fixtures, electrical components, site improvements, and other qualifying assets.
The completed study provides detailed support for the property's depreciation classifications and gives your tax preparer the information needed to incorporate the results into your tax return.
Accelerate eligible depreciation.
Reclassifying qualifying property may allow deductions that otherwise would have been spread over decades to be taken sooner, subject to applicable tax rules.
Understand the estimated tax impact.
Before recommending a study, I want to understand whether accelerating depreciation is likely to create a meaningful benefit based on your property and tax situation.
Consider the bigger picture.
Accelerating depreciation can provide substantial current tax benefits, but it can also affect future depreciation and the tax consequences when the property is eventually sold.
I help you understand both sides of that equation rather than looking only at the first-year deduction.
From property information to a completed study.
We discuss your property and tax situation.
We'll talk about the property, when you acquired or constructed it, its cost, how it's being used, and what you're trying to accomplish.
We evaluate whether a study makes sense.
Before moving forward, we'll consider the property's characteristics, the potential depreciation benefit, your tax situation, and the cost of completing the study.
We gather the property information.
Depending on the project, the study may require closing documents, construction information, depreciation schedules, property records, plans, photographs, or other supporting information.
The property is analyzed.
The cost segregation analysis identifies and documents property components that qualify for different depreciation classifications and recovery periods.
You receive the completed study.
You'll receive the study and supporting schedules needed to incorporate the results into your tax reporting.
If another CPA prepares your tax return, you can provide the completed study to that CPA.
Frequently asked questions
What is a cost segregation study?
Most residential rental buildings are generally depreciated over 27.5 years, while most nonresidential real property is generally depreciated over 39 years.
A cost segregation study identifies portions of the property that may instead qualify as assets with shorter recovery periods, such as 5-, 7-, or 15-year property.
Accelerating those deductions can reduce current taxable income and improve near-term cash flow.
What types of properties can qualify?
Cost segregation may be applicable to many types of income-producing or business properties, including short-term rentals, traditional rental properties, office buildings, retail properties, industrial facilities, and other commercial real estate.
Whether a study makes financial sense depends on the property and the owner's tax circumstances.
Does the property have to be newly purchased?
No.
Depending on the circumstances, owners of properties acquired in prior years may still be able to complete a cost segregation study.
When appropriate, a change in depreciation treatment may be made through an accounting method change rather than amending each prior-year tax return.
Does cost segregation mean I permanently avoid the tax?
Not necessarily.
Cost segregation generally accelerates depreciation-it changes when deductions are taken rather than simply creating deductions that otherwise wouldn't exist.
There may also be depreciation recapture or other tax consequences when the property is sold.
That's why I believe cost segregation should be evaluated as part of the property's overall tax and investment strategy rather than based solely on the size of the initial deduction.
Can bonus depreciation apply?
Potentially.
Certain property identified through a cost segregation study may qualify for bonus depreciation under the tax rules in effect for the applicable year.
Eligibility depends on the property, when it was placed in service, and the tax law applicable at that time.
Will I be able to use all of the depreciation immediately?
Not necessarily.
Generating a deduction and being able to use that deduction currently are two different things. Passive activity rules, basis limitations, at-risk rules, and other provisions can affect when deductions are usable.
Your individual tax circumstances need to be considered before determining the actual benefit.
Is cost segregation part of tax planning?
It can be.
The cost segregation study focuses on a specific property. Tax planning looks at how accelerated depreciation interacts with your income, other investments, business activity, and broader financial goals.
For many clients, I believe evaluating those issues together provides a much more useful answer than simply asking how large a depreciation deduction the study can generate.
Do I need to use O'Brien CPA & Advisory for tax preparation?
No.
Cost segregation can be provided independently. If another CPA prepares your return, the completed study can be provided to that CPA for use in preparing the applicable tax filings.
