Cost Segregation

Cost segregation is an engineering-based study that breaks a purchased or constructed building into components that depreciate at different speeds. By default, a residential rental depreciates over 27.5 years and commercial property over 39 years. A study reclassifies parts of the purchase price, such as flooring, cabinetry, specialty electrical, appliances, and land improvements like parking and landscaping, into 5-, 7-, and 15-year property. Because property in those shorter classes is eligible for bonus depreciation, a study frequently converts 20% to 35% of a building's cost into deductions available immediately, dramatically front-loading tax savings. The strategy pairs with material participation rules: the losses it creates are only usable against wages if the owner qualifies under REPS or the short-term rental rules. Recapture on sale and study cost mean it is best for owners who will hold the property and can use the losses.