The Benefits of Using Cost Segregation Studies

6 Minute Read

As a real estate investor, one of the most powerful tax-saving strategies you can use is cost segregation. This IRS-approved method allows you to accelerate depreciation deductions, which means you can reduce taxable income and free up cash to reinvest in your properties.

Before we dive deeper, make sure you check out our post on Depreciation Explained for a foundational understanding of how depreciation works for real estate investors.

What Is a Cost Segregation Study?

A cost segregation study is an in-depth analysis performed by tax professionals and engineers to identify portions of a property that can be depreciated over shorter time frames (5, 7, or 15 years) instead of the standard 27.5 years (residential) or 39 years (commercial).

By reclassifying certain building components, like flooring, electrical systems, or landscaping, investors can accelerate depreciation and take larger deductions earlier in the property’s life.

Key Benefits of Cost Segregation for Real Estate Investors

1. Accelerated Depreciation

Instead of waiting nearly three decades to fully depreciate your property, you can claim substantial deductions within the first few years of ownership.

2. Immediate Tax Savings

The larger deductions from accelerated depreciation reduce your taxable income, which can significantly cut your annual tax bill.

3. Increased Cash Flow

Lower taxes mean more cash in your pocket. That extra liquidity can be used for property improvements, acquisitions, or paying down debt.

4. Maximized Bonus Depreciation

Thanks to recent tax law updates, many assets identified in a cost segregation study are eligible for 100% bonus depreciation in the year the property is placed into service. This can lead to six-figure tax savings, especially for commercial and multifamily properties.

5. Estate and Exit Strategy Planning

Cost segregation doesn’t just help during ownership. It can also improve after-tax returns when selling a property or transferring wealth, giving investors more flexibility in their long-term strategy.

When Should Investors Consider a Cost Segregation Study?

• Purchasing new construction properties

• Acquiring existing properties

• Renovating or expanding real estate holdings

Typically, cost segregation makes the most sense for properties valued at $500,000 or more, but even smaller investments can sometimes benefit depending on the situation.

Is Cost Segregation Right for You?

While cost segregation can be a game changer, it’s not a one-size-fits-all strategy. It’s best to consult with a CPA who specializes in real estate taxation to determine whether the potential tax savings outweigh the cost of the study.

At Cornerstone CPA, we work with real estate investors every day to identify opportunities like cost segregation studies that maximize deductions and improve after-tax cash flow.

Final Thoughts

If you’re serious about scaling your real estate portfolio and want to free up more capital to reinvest, a cost segregation study could be the key to unlocking those tax savings.